Harman International 2006 Annual Report by l09kkko

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									Harman International 2006 Annual Report
THE ANNUAL REPORT ILLUSTRATIONS


               Only four times in JBL’s 60-year history have engineers been given a free hand to       Page 2
               pursue pure sonic accuracy, unconstrained by cost considerations and other inhibiting
               factors. The Project Everest DD6600 loudspeaker system is more than just the
               most lifelike musical instrument JBL® has ever built. It forcefully reasserts JBL’s
               technological leadership, setting a performance benchmark that will stand for
               years to come.

              Drive + Play™ from Harman/Kardon® gives drivers total and safe control of their          Page 4
              iPods® in any vehicle. The large, backlit display mounts on the dash or windshield
              where it is always just a quick glance away. A separate iPod navigator mounts within
              easy reach. Drive + Play is the award-winning car audio solution for iPod, and it is
              just one of Harman’s growing catalog of innovative multimedia products.


               MyGIG, the marvelous new multimedia infotainment system, designed and
                       ™                                                                               Page 6
               produced for Chrysler, provides Hard Disk Drive (HDD) GPS Navigation with real time
               traffic updates, a Video Entertainment System, HDD Music Jukebox & Media Storage
               capabilities, a Voice Dialog System for Audio, Navigation, and Phone, USB and
               Bluetooth compatibility.


               Gracing the 2007 Mercedes S-Class is the Harman/Kardon LOGIC 7® premium                 Page 7
               surround sound system. State-of-the-art loudspeakers offer unsurpassed excellence
               while listening to CD, MP3, DTS music discs, and DVD audio and video formats. The
               Mercedes COMAND Navigation System offers security and efficiency with the most
               detailed map display.


               Stade de Suisse is a new 32,000 seat stadium which the Swiss regard as a                Page 8
               “meeting point, shopping and business center—a gourmet temple.”
               Completed this year, the stadium boasts an 80,000 watt HiQnet Harman
                                       ®
               system with JBL, Crown, BSS® and Soundcraft® products.




               JBL extends its lineup of best-in-class aftermarket car-audio products with CS Series   Page 10
               muti-element loudspeakers. Bass response is an essential performance characteristic
               in this category, and the CS Series extends deep bass output with its patented
               Plus One. At the other end of the audio spectrum, dome tweeters, a proven JBL
               technology in professional and home-audio loudspeakers, supply the clean, distinct
               highs usually associated with much more expensive systems.

               The AKG® C747 is a tiny shotgun microphone                                              Page 13
               designed for exacting orchestral, choir, podium and
               boardroom applications.




               The Rolling Stones Super Bowl XL half-time show utilized JBL VerTec® loudspeakers.      Page 18
               System supplier: ATK AudioTek. The Super Bowl XL stadium venue was Ford Field
               in Detroit, Michigan, which is equipped with a permanent JBL loudspeaker system.




               Harman/Kardon takes the “one-box” home theater system to a new level with               Back Cover
               7.1-channel surround-sound systems that look, sound and function like nothing else
               available. Featuring advanced A/V receivers with proprietary LOGIC 7 audio process-
               ing and EZSet equalization, high-fidelity DVD players with both HDMI video and SACD
               audio output, and compact speakers engineered to work together as a system with
               the electronics, Harman/Kardon delights audiophiles and videophiles alike.
Financial Highlights




Five-Year Summary
(in thousands, except per share data, for the fiscal years ended June 30)


                                                                 02                  03                       04               05           06
Net Sales                                         $ 1,826,188               $ 2,228,519            $ 2,711,374       $ 3,030,889    $ 3,247,897
Operating Income                                        103,221                166,894                254,465            350,981       397,241
Income Before Income Taxes                                  80,177             142,471                227,520            335,337       376,187
Net Income                                                  57,513             105,428                157,883            232,848       255,295
Diluted EPS                                                   0.85                 1.55                     2.27             3.31         3.75
Total Assets                                         1,480,280               1,703,658              1,988,810         2,187,203      2,354,661
Total Debt                                              474,679                503,068                394,925            333,917       197,554
Cash and Cash Equivalents                                   71,203             109,361                286,708            291,214       291,758
Shareholders’ Equity                                    526,629                655,785                874,996         1,060,948      1,228,164




Net Sales                                                                       Earnings Per Share
(in billions)                                                                   (diluted)

$3.50                                                                           $4.00
                                                     3.25                                                                    3.75

$3.00                                     3.03                                                                        3.31

                                2.71                                            $3.00

$2.50
                                                                                                              2.27
                      2.23                                                      $2.00
$2.00                                                                                                  1.55
           1.83

                                                                                $1.00
$1.50                                                                                       0.85


$1.00                                                                           $0.00
           2002      2003      2004       2005      2006                                    2002     2003     2004   2005    2006
Message from The Executive Chairman




It is critical to know when the technology is ready and when the market is ripe.
Today more than at any time in industrial history, that is the test of management.

Our Company set new records for sales and earnings            That last piece is so crucial. Stay too long with an
last year. Sales increased 7% to $3.248 billion. Earnings     otherwise attractive product and management risks
per share reached $3.75, a solid 13% increase above last      the loss of all the profit it originally generated. Along
year. Included in those earnings was a $0.14 per share        with that loss of profit, equal dangers—the loss of
charge to cover the cost of restructuring, principally at     momentum, the loss of reputation.
our European operations to increase efficiency and
productivity, and costs associated with the repurchase        It is, therefore, critical to know when the technology
of $282 million of bonds. Excluding the restructuring         is ready and when the market is ripe. Today more than
charge, and bond repurchase costs, earnings per share         at any time in industrial history, that is the test of
were $3.89, an 18% increase above the prior year.             management. When to get on—when to get off.
                                                              Those judgments drive decisions on investment in
We accomplished these excellent results in a turbulent        factories, in locations, inventories, tooling—in virtually
and increasingly complex business environment. In             every aspect of the business process.
that world, dramatically changing technology and
equally dramatically changing marketplaces dictate            To dramatize the thought, I suggest the image of the
more creative and shorter product cycles. Those               surf and the surfer. The surf can be turbulent and
shorter cycles carry significant challenges and risks.        seemingly unpredictable. The surfer had better be alert,
Both the analysis of cost v. benefit and the forecasting      responsive and decisive. In surfing, the alignment
of return on investment become much more difficult.           of the contours relative to the swell direction
                                                              determines the duration of the breaking process.
Shorter and more frequent product cycles clearly              Instinctively, intuitively, the surfer knows this. In our
demand more and “newer” engineering. They require             business, understanding the alignment of the cultural
far tighter control of costs and, no less significantly, of   contours relative to the direction of the technology and
time. It is the most demanding and complex                                the competitive environment pretty well
challenge to management today. A lengthy                                  determines the duration of a successful
time ago, Paul Getty suggested that the key to                            product. Reading that swell, riding the
success is: “Get up early, work hard—find                                 swell, getting off and anticipating and
oil.” It is a good joke but I think today’s                               interpreting the next swell are the essence
version would more likely read: “Develop the                              of the technology/product/marketing
new product—have a great hit—stay with it                                 continuum. Thus, the cover of this
for the right length of time.”                                            Annual Report.


                                                                                                                       3
The surf can be turbulent and seemingly unpredictable. The surfer had better be
alert, responsive and decisive.
Permit me to illustrate my theme:                          recognition, climate control and Internet access. PNDs
                                                           provide some version of those same services in a hand-
Our Automotive division continued to lead the              held portable device. We see the PND as a stimulant;
Company and the industry throughout the year. Its          not a threat, to our OEM business. Many buyers of the
brilliant new system for the all-new Mercedes S-Class      PND are introduced through that device to the value of
has been lauded as truly advancing the state-of-the-art.   navigation and other functions provided in the car.
Our long-demonstrated leadership in the automotive         Frequently, that introduction leads to a decision to
field was made more secure through wise employment         purchase an automobile with one of our Infotainment
of the technology, even as we continued to enhance         Systems installed. Our analysis led us to the decision
it. The opportunity to produce multi-functional            that we should be in the PND business precisely
Infotainment Systems that service mid-range and entry-     because we see it as companion to our OEM activity.
level vehicles has broadened the scope of our business     Here is a good example of what I think of as “effective
and increased substantially the potential market.          surfing.” The Consumer group developed a PND
                                                           approach from its own perspective. Harman Becker, in
Our report illustrates the new Chrysler “MyGIG”            our Automotive group, has generated PND product
Infotainment System. It is fair to characterize it as      offerings with a different emphasis. In Europe, this
state-of-the-art and very important because it is the      group has sold over 250,000 units since December
first true Infotainment System to be offered by one of     2005. They are branded “Traffic Assist High Speed.”
the traditional Big 3 American automakers. We know         We conclude that there is market opportunity for both
that it is a superb system and we are encouraged by the    organizations. In some ways, this defies business
enormous enthusiasm for it at Chrysler.“MyGIG” is an       orthodoxy. Still, we have prospered for decades with
excellent expression of the theme of this report.          both Infinity and JBL loudspeaker products and with
                                                           Harman/Kardon and Mark Levinson electronics.
In our Consumer electronics business, the development      Seen in traditional terms, these brands are competing
of the personal navigation device (PND) is important.      but, in our view, they serve different customers with
We know a great deal about navigation. We are the world    different needs.
leaders in designing and
manufacturing Infotainment                                                            No doubt, some buyers of
Systems for the automakers.                                                           PNDs will use them for
Our systems provide many                                                              navigation in the car. We
other services to the riders                                                          don’t think that is a great
in the automobile. They                                                               idea because we see enor-
include audio, video, voice                                                           mous advantage in having


6
Our role is to develop, produce and market products that enhance those produced
by the cell phone makers and by companies such as Apple and Microsoft.


all entertainment, communication and navigation             the facility offered by the iPod, a powerful new wave of
functions represented on a single graphic user              consumer response will undoubtedly develop. The best
interface in the car. Further, as we have studied the       estimates in the industry suggest that upwards of one
intersection of the culture and the technology, we          billion (think of it, one billion) music-enabled phones
conclude that, down the road, it will be less a matter of   will be sold annually beginning in the year 2009.
bringing the personal navigation device into the car        The first generation of such phones has already
and more a matter of bringing the personal navigation       appeared from Motorola, Sony and Nokia. For numer-
device out of the car and into other life activities.       ous technical reasons, they have not met the bench-
We are, therefore, designing future automotive systems      mark iPod. Until they do, that enormous opportunity
to permit the car owner to do just that—to, in effect,      will not be realized. We are working with the cell phone
unplug the navigation instrumentation and carry it          makers and we are confident that they will overcome
with him wherever he goes.                                  the present obstacles. At the same time, it is predictable
                                                            that Apple will not sit by as observer. There are audio
Nothing speaks more vividly of opportunity coming in        and video opportunities available to that very creative
waves than the history of the MP3 player and the            company. And then there is Microsoft. It has just
music-enabled phone. The MP3 player responded to            announced its entry with its totally new “Zune,”
consumers’ need for a truly portable device with which      a product meant to be directly competitive with the
they could record, store and playback their favorite        iPod. We sit in an attractive place. Our role is to develop,
music. That appetite spread across generations and          produce and market products that enhance those
reached a dramatic moment with the arrival of Apple’s       produced by the cell phone makers and by companies
iPod. Since its introduction, iPod has sold over fifty      such as Apple and Microsoft. It is, of course, not a simple
million units and it is going strong. iPod moved            matter and, it can be said that there is a series of nearly
beyond the MP3 to provide far more facility in storage,     simultaneous waves which define the opportunity.
titling, ease of use and quality of reproduction. And its   The challenge to us is to anticipate and interpret this
industrial design resonated across those generations.       new expression of opportunity in terms that respond
                                                            directly to the consumer interest. That is what we
No surprise that the success of the iPod has stirred the    are about.
imagination and appetites of all cell phone makers.
And no surprise that great expectations are developing      In our Professional business, we are enjoying a similar
for the so-called music-enabled phone. Clearly, if that     experience. For decades, our products—and the
phone can provide immaculate communication plus             products of competitors—were designed to be hooked



                                                                                                                      11
We do not avoid poor practice because we may be penalized for it. Rather, we proceed with
the conviction that good, clean practice serves the Company and its shareholders best.


together to provide audio coverage in theaters, hospitals,   Field in Phoenix, the system for the grand opening of
stadia and in other venues such as outdoor concerts.         the recently concluded World Cup Soccer tournament
The systems were large, heavy and limited in                 in Germany, Ford Field in Detroit, site of Super Bowl XL,
functionality. With the introduction of our HiQnet           and Stade de Suisse, an impressive new soccer stadium
networking protocol, we are transforming the                 in Switzerland.
professional business. Our approach configures,
connects and controls a complete professional sound          Now, a few words about our Company, its character
system, from microphone to speaker, on one unified,          and its people. I think you know that we were one of
digital network. It eliminates duplication and confusion     the first public companies to voluntarily expense the
and it facilitates realtime problem diagnosis and            cost of stock options. We did this at a time when the
correction. For hardware to work, in a HiQnet system,        matter was quite controversial and when important
it must be designed to engage the HiQnet. We have            elements in American industry were arguing that the
been very active all year, making the necessary              practice might bankrupt many companies and surely
modifications to our amplifiers, speakers, microphones       inhibit the creative work that characterized Silicon
and processors to permit that engagement. During the         Valley. Since the expensing of options became
year, we shipped in excess of forty thousand units of        mandatory, it has become clear that the doomsayers
HiQnet-compatible product to end users. They repre-          had seriously exaggerated concerns. There has been
sented a full ten percent of our total Professional sales    no trace of the predicted debacle. In the meantime,
in the year. HiQnet will become a substantially larger       our earnings reports have been conservative,
component of our revenue in the new year as we add           accurate and transparent.
thirteen additional new compatible product lines. I am
particularly pleased that our AKG microphone company         Today’s papers carry frequent stories of the eighty
has played an active role in this development. That          companies now under review by the Securities and
participation has contributed to an impressive turn-         Exchange Commission for possibly back-dating the
around of this Austrian subsidiary.                          issuance of stock options to senior executives. Such a
                                                             practice would have been at the expense of shareholders
There were many important new HiQnet professional            and fundamentally unfair. We have never done it.
installations during the year. They included the new         We have always issued options on a scheduled basis
50,000 seat Stanford University Stadium, the Arizona         following careful review and approval by our Board
Diamondback Major League Baseball team’s Chase               of Directors.




12
                                         LEFT TO RIGHT IN PHOTO:
                   Kevin Brown, Executive Vice President and Chief Financial Officer
         Erich Geiger, Executive Vice President and Chief Strategy and Technology Officer and
                        formerly Chief Executive Officer of the Automotive Group
             Helmut Schinagel, incoming Chief Executive Officer of the Automotive Group
                                  Sidney Harman, Executive Chairman
                         Blake Augsburger, President of the Professional Group
                            Gina Harman, President of the Consumer Group
                      Bernard A. Girod, Vice Chairman and Chief Executive Officer



               Bernie Girod has served our company superbly for twenty years.
     He has earned our respect and our admiration. When he retires at the end of the year,
           he will leave the company a splendid legacy and he will depart with the
                          board’s and the employees’ deep affection.
                                                              Sidney Harman




14
I think this matter is pertinent because it speaks to a      After an outstanding career as President of our
fundamental in our Company. We do not avoid poor             Professional group, Mark Terry has been obliged to
practice because we may be penalized for it. Rather,         retire for personal health reasons. He has been
we proceed with the conviction that good, clean              succeeded by Blake Augsburger who served with
practice serves the Company and its shareholders best.       distinction over the last five years as Chief Executive
We spend no time looking for edges or questioning            Officer of our Professional Crown subsidiary. Blake
whether we can “get away with it.” We can—and we             knows our business and our personnel thoroughly.
do—devote all of our time and attention to the honorable     He has moved from Elkhart, Indiana to Northridge,
and constructive operation of the business.                  California and the transition there has been accom-
                                                             plished quickly and effectively. Mark Graham has
Finally, a word on management. We are in a period of         moved up from his position as Marketing and
important transition, a transition intended to provide       Engineering head at Crown to succeed Blake as its
optimum leadership in the next decades. As you know,         CEO. Kevin Brown is entering his second year as Chief
Bernie Girod has served this Company superbly for            Financial Officer of the Corporation. He is doing that
twenty years. He plans to retire as our Chief Executive      job beautifully—and has been promoted to Executive
Officer at the end of this calendar year. Although our       Vice President and Chief Financial Officer. With
recent appointment of a replacement did not work             Helmut on board to run Automotive, Erich free to
out, we have inititated a new search for a world-class       exercise his remarkable talent as Chief Strategy and
successor and expect to have that position filled before     Technology Officer and with Blake Augsburger and
Bernie departs.                                              Gina Harman in full control of the Professional and
                                                             Consumer divisions, we are stanced for the next
Helmut Schinagel will succeed Erich Geiger as Chief          decades of company leadership.
Executive Officer of our Automotive group on October
1, 2006. Helmut has had a rich career in the automotive      In summary, we pay rapt attention to the remarkable
industry and will join us after years at BMW in              set of dynamics which are creating challenges and
Germany. There, he has been our “customer,” leading          opportunities in the world of technology and in an
the interior development programs for that mar-              ever-expanding set of global markets. We look forward
velously creative automobile company. Helmut joins           to continuing to interpret and to ride that surf.
us with goodwill from BMW. With his successor at
Harman/Becker in place, Erich Geiger will be free to         Sincerely,
direct his formidable talent and creativity to the role of
worldwide Chief Strategy and Technology Officer.
Helmut and Erich are working a smooth transition at
the Automotive group. I am confident that it will prove      Sidney Harman
seamless and productive.                                     Executive Chairman




                                                                                                                  15
Message from The Chief Technology Officer




Infotainment and Portable Connectivity                       Infotainment Systems were previously designed as net-
                                                             worked or “one box” systems and were controlled
Last year, I described the seamless integration of “Driver   through body electronic buses. Connectivity to the car
Assist” functionality into a modern Infotainment             was enabled through BUS-Gateways and to the outside
System facilitated by the unique architecture and tech-      world through network access devices.
nical capacity of our scaleable platform. This year, I am
pleased to report we have made significant progress in       Once the car was produced, the Infotainment System
realizing this objective. We have completed the proto-       was limited to those two channels to obtain useful
type of an IR pulse modulated detector (3D PMD               information for “Driver Assist” functionality or to
Camera) which generates a 3-dimensional video image          inform and entertain the driver.
and enables full control of the spatial environment
inside and around the car. Enabled by our high-speed         Performance and features were thus dependent upon
network technologies, we are able to transport the           the vehicle option package selection at the time of pur-
critical digital video signals to our powerful computing     chase and remained throughout the life of the vehicle.
platform with minimum latency, avoiding the extra            The approach served the industry well, but clearly
electronic control units used in a typical, non-             there is need for a more digital, future oriented approach.
networked system.
                                                             The new automotive infotainment business model
Concurrently, we have developed a scaleable approach         must consider the key aspects of the consumer market,
which uniquely transports the important functionality        where connectivity, portability, scalability and
of portable connectivity to our next generation of           upgradeability are implicit. We approach the next
automotive Infotainment Systems.                             generation of OEM infotainment as the “Harman
                                                             Personal Connectivity System.”



Driver Recognition
                                                                                                                           15 feet




                                                                                                                           0 feet


16
The first device is an integrated automotive infotain-       The eternal problem of fast aging consumer products
ment processing unit that provides base functionality,       and permanently changing formats can be overcome
in-vehicle network connectivity and provisions for an        by adding the latest PCD to the car. Then the
external interface to a second device.                       Infotainment System remains permanently up to date.


The second device—a personal connectivity device or          This innovative infotainment model allows the end
PCD, is a portable and upgradeable processing device         consumer point-of-sale feature selection that is inde-
that attaches, wired or wireless, to the installed device.   pendent of the vehicle base hardware. Furthermore,
This pairing of these two plus devices generates the         this system solution presents the OEM industry with
potential for virtually unlimited scalable functionality     an enormously valuable opportunity for post-sale
with unparalleled personal portability and connectivity.     products and functional upgrades.


By operating both the Head-Unit and the PCD on our
QNX Operating System, we will utilize our powerful
Q-Net technology to connect the portable device to the
Head-Unit, providing new, enhanced functional                Dr. Erich Geiger
modes in both units. When the portable connectivity          Executive Vice President and
device is removed from the car environment, each             Chief Technology Officer
device will continue to operate in its own domain, with
its individual on-board functionality.




Mobile Device Integration




                                                                                                                 17
Message from The Vice Chairman and Chief Executive Officer




The Company achieved record results for the fifth year        from last year. Capital expenditures represent 4%
in a row. Sales increased 7% to $3.248 billion.               of sales versus our historical average of more than 5%.
Operating income, excluding restructuring and debt            Total debt declined $136 million to $198 million.
repurchase costs, rose 90 basis points, from 11.6% of         Our cash balance now exceeds debt by more than
sales in fiscal 2005 to 12.5% in fiscal 2006. Earnings per    $94 million. This debt reduction was achieved even
share from operations, excluding restructuring and            after spending $193 million to repurchase our stock.
debt repurchase costs, increased 18% from last year’s         Cash flow from operations was $400 million for the
level to $3.89. Against that EPS level of $3.89, we           year. Shareholders’ equity increased to more than
applied a restructuring charge and had debt                   $1.2 billion, an increase of $805 million since 2001.
repurchase costs that totaled $0.14 per share in the
fourth quarter. Thus, the net result for the year is $3.75,   Operating results for each of the Company’s three
up 13% from fiscal 2005. The restructuring charge             groups were very strong. The Consumer group
includes cost reduction programs at several manufac-          achieved record results, as sales grew 18% to $494
turing sites. The debt repurchase costs include the pre-      million. Operating income grew 87% to $50 million,
mium paid for repurchasing a substantial amount of            representing 10.1% of sales. An important part of this
our senior notes. Strong operating results were               stunning performance was the success of the new
achieved despite record spending for R&D to develop           Multimedia products. This category continues to show
systems for the substantial new Automotive awards             promise, and we are optimistic about continuing
which will launch over the next three years.                  success in 2007 as we launch new products for portable
                                                              music systems including music-enabled cell phones.
In the last five years, the Company’ s sales have grown
at an average annual rate of 14%. Operating income            The Automotive group had a 5% increase in sales,
has grown from 4.1% of sales to 12.2%. Earnings               driven in part by the successful launch of a very
per share increases have averaged more than 50%               sophisticated electronic system in the new Mercedes-
annually. Shareholders’ equity has grown from $423            Benz S-Class. The Automotive group also introduced
million in 2001 to more than $1.2 billion in 2006.            Personal Navigation Devices which achieved promising
                                                              results in their first year. The group’s operating results
The Company’s balance sheet continued to improve.             were moderated by a substantial increase in R&D
Investment in working capital from operations, which          spending, a necessity to develop the systems for which
excludes cash and debt, decreased from$166 million to         we have received awards launching in the next three
$107 million, representing only 3.3% of sales. Capital        years. Operating income was $338 million, representing
expenditures were $130 million, down $42 million              15.1% of sales.



                                                                                                                      19
Strong operating results were achieved despite record spending for R&D to
develop systems for the substantial new Automotive awards which will launch over
the next three years.

The Professional group had a very good year. Sales        We are encouraged by our progress in 2006, take pride
increased 6% to $517 million. Operating income            in our return to shareholders in the last five years, and
increased 30% to $59 million, representing 11.5% of       look forward to continuing improvement in 2007.
sales. The Professional group produced new systems
using its HiQnet protocol which greatly facilitates the
integration and operation of complex audio systems.
Its European operations continued improvements
in profitability. We expect them to make further
contributions in 2007 as they launch new wireless         Bernard A. Girod
                                                          Vice Chairman and Chief Executive Officer
microphones and digital mixing consoles.


We continue to build for the future. During the year,
we received a significant new award from PSA
Peugeot/Citroën for its infotainment systems begin-
ning in our 2009 fiscal year. We were also awarded the
prestigious L-6 platform at BMW and several other
awards from Hyundai, SsangYong Motors and others.
The Company’s competitive position has never been
stronger.




20
                                             UNITED STATES
                                 SECURITIES AND EXCHANGE COMMISSION
                                                    Washington, D.C. 20549

                                                           FORM 10-K

⌧     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
                          For the fiscal year ended June 30, 2006
                           Commission File Number 001-9764

                         Harman International Industries, Incorporated
                                     (Exact Name of Registrant as Specified in Its Charter)

                           Delaware                                                              11-2534306
                 (State or Other Jurisdiction of                                              (I.R.S. Employer
                Incorporation or Organization)                                               Identification No.)

       1101 Pennsylvania Ave., N.W., Suite 1010,
                   Washington, D.C.                                                                 20004
         (Address of Principal Executive Offices)                                                 (Zip Code)
                          Registrant’s telephone number, including area code: 202-393-1101
                                  Securities registered pursuant to Section 12(b) of the Act:
                      Title of Each Class                                     Name of Each Exchange on Which Registered
         Common Stock, par value $.01 per share                                        New York Stock Exchange
            Preferred Stock Purchase Rights                                            New York Stock Exchange
                               Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ⌧ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes       No ⌧

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

                          Large accelerated filer ⌧ Accelerated filer         Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes       No ⌧

The aggregate market value of the voting common stock held by non-affiliates of the Registrant as of December 31, 2005 (the last
business day of the Registrant’s most recently completed second fiscal quarter) was $5,936,403,038, based upon the closing price
of the shares on the New York Stock Exchange on that date.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
65,173,877 shares of common stock, par value $.01 per share, as of August 31, 2006.
                                         DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to the 2006 Annual Meeting of Shareholders to be held
November 2, 2006 are incorporated by reference into Part III.
                                            Forward–Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E
of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. Forward-looking
statements include information concerning possible or assumed future results of operations, capital expenditures, the
outcome of pending legal proceedings and claims, including environmental matters, goals and objectives for future
operations, including descriptions of our business strategies and purchase commitments from customers, among other
things. These statements are typically identified by words such as “believe,” “anticipate,” “expect,” “plan,” “intend,”
“estimate” and similar expressions. We base these statements on particular assumptions that we have made in light of our
industry experience, as well as our perception of historical trends, current conditions, expected future developments and
other factors that we believe are appropriate under the circumstances. As you read and consider the information in this
report, you should understand that these statements are not guarantees of performance or results. They involve risks,
uncertainties and assumptions. In light of these risks and uncertainties, there can be no assurance that the results and
events contemplated by the forward-looking statements contained in, or incorporated by reference into, this report will in
fact transpire.
Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that
many factors could affect our actual financial results or results of operations and could cause actual results to differ
materially from those expressed in the forward-looking statements. For additional information regarding certain factors
that may cause our actual results to differ from those expected or anticipated, see the information under the caption “Risk
Factors” which is located in Item 1A of Part I of this report.

                                            TABLE OF CONTENTS
                                                                                                                      Page
Part I
Item     1.       Business                                                                                              1
Item     1A.      Risk Factors                                                                                          8
Item     1B.      Unresolved Staff Comments                                                                            12
Item     2.       Properties                                                                                           13
Item     3.       Legal Proceedings                                                                                    14
Item     4.       Submission of Matters to a Vote of Security Holders                                                  14
                  Executive Officers of the Registrant                                                                 14
Part II
Item 5.           Market for Registrant’s Common Equity, Related Stockholder Matters and
                  Issuer Purchases of Equity Securities                                                                15
Item     6.       Selected Financial Data                                                                              16
Item     7.       Management’s Discussion and Analysis of Financial Condition and
                  Results of Operations                                                                                17
Item     7A.      Quantitative and Qualitative Disclosures About Market Risk                                           30
Item     8.       Financial Statements and Supplementary Data                                                          32
Item     9.       Changes in and Disagreements With Accountants on Accounting and
                  Financial Disclosure                                                                                 61
Item     9A.      Controls and Procedures                                                                              61
Item     9B.      Other Information                                                                                    61
Part III
Item 10.          Directors and Executive Officers of the Registrant                                                   61
Item 11.          Executive Compensation                                                                               62
Item 12.          Security Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters                                                                                  62
Item     13.      Certain Relationships and Related Transactions                                                       62
Item     14.      Principal Accounting Fees and Services                                                               62
Part IV
Item 15.          Exhibits and Financial Statement Schedules                                                           62
Signatures                                                                                                             65
The page numbers in this Table of Contents reflect actual page numbers, not EDGAR page tag numbers.

References to “Harman International,” the “Company,” “we,” “us” and “our” in this Form 10-K refer to Harman
International Industries, Incorporated and its subsidiaries unless the context requires otherwise.
Part I
Item 1. Business

Harman International Industries, Incorporated was incorporated in Delaware in 1980.

We believe we are a worldwide leader in the development, manufacture and marketing of high-quality,
high fidelity audio products and electronic systems. We have developed, both internally and through a
series of strategic acquisitions, a broad range of product offerings sold under renowned brand names in
our principal markets. We believe that we are a leader in digitally integrated infotainment systems for the
automotive industry. We believe our JBL, Infinity, Harman/Kardon, Mark Levinson and Becker brand
names are well known worldwide for premium quality and performance. We have built these brands by
developing our world-class engineering, manufacturing and marketing competences and have employed
those resources to establish our company as a worldwide leader in the markets we serve.

We report our business on the basis of three segments: Automotive, Consumer and Professional. For
additional information about these segments, see Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in Item 7 of Part II of this report and Note 13 in the
Consolidated Financial Statements located in Item 8 of Part II of this report.

Our Automotive segment designs, manufactures and markets audio, electronic and infotainment systems
for vehicle applications primarily to be installed as original equipment by automotive manufacturers. Our
automotive products are marketed worldwide under brand names including JBL, Infinity, Mark Levinson,
Harman/Kardon, Logic 7, Lexicon and Becker. Through engineering and supply agreements, our
premium audio systems and infotainment product offerings are sold to a number of global automotive
manufacturers including DaimlerChrysler, the BMW Group, Toyota/Lexus, Audi/VW, Porsche, Land
Rover, Hyundai, Kia and Peugeot/Citroën. We also produce a Harman/Kardon branded infotainment
system for Harley-Davidson touring motorcycles. Our infotainment systems are a combination of
information and entertainment components which may include or control GPS navigation, traffic
information, voice-activated telephone and climate control, rear seat entertainment, wireless Internet
access, hard disk recording, MP3 playback, backup camera and a high-end branded audio system. These
systems include scaleable software allowing us to better serve a range of vehicles from luxury through
entry-level. We also produce aftermarket personal navigation devices that are currently being sold in
Europe.

Our Consumer segment designs, manufactures and markets audio, video and electronic systems for home,
mobile and multimedia applications. Our Consumer products are marketed worldwide under brand
names including JBL, Infinity, Harman/Kardon, Lexicon, Mark Levinson and Revel. Our audio, video and
electronic systems are recognized throughout the world for superior sound quality and high performance.
Our home product applications include systems to provide high-quality audio throughout the home and
our mobile products include an array of aftermarket systems to deliver audio entertainment in the vehicle.
Our home audio and electronic products are offered primarily through audio/video specialty stores and
retailers such as Circuit City, Best Buy, MediaMarkt and Fnac. Our branded audio products for
multimedia users are primarily focused on retail customers. Our multimedia products are geared towards
providing an enhanced sound for Apple’s iPod and other digital audio players and are sold in retail stores
such as the Apple stores, Best Buy and Target.

Our Professional segment designs, manufactures and markets loudspeakers and electronic systems used by
audio professionals in concert halls, stadiums, airports, houses of worship and theme attractions. We also
                                                     1
design products for recording, broadcast, cinema and music reproduction applications. In addition, we
provide high-quality products to the sound reinforcement, music instrument support and broadcast and
recording segments of the professional audio market.

We offer complete systems solutions for professional installations and users around the world. Our
products can be linked by our HiQnetTM network protocol providing a central digital network for audio
professionals to control different aspects of a complex system. Our Professional brands include JBL
Professional, Crown, Soundcraft, DigiTech, dbx, AKG, Lexicon, BSS and Studer. We believe that we are
uniquely equipped to provide turnkey systems solutions for professional audio applications that offer the
customer improved performance, reliability, ease of installation and reduced cost.

Our results of operations depend on our sales of audio products and electronic systems in the automotive,
consumer and professional markets. Our products are sold worldwide, with the largest markets being the
United States and Germany. A significant portion of our revenues are Euro denominated.

We believe significant growth opportunities continue to exist with automotive manufacturers through
increases in the number of models offering our audio, navigation and infotainment systems, supply
agreements with additional automakers, increases in per-vehicle content through the provision of
integrated infotainment systems with premium branded audio systems and higher penetration levels of
audio and infotainment systems within existing models. We believe significant growth opportunities exist
in the consumer electronics market as the home and multimedia technologies continue to converge.
We also believe growth opportunities exist in professional markets and expect that our HiQnet system
protocol will allow us to capitalize on these opportunities as this technology simplifies the interaction of
our products and provides users with an incentive to purchase complete HiQnet compatible systems.

Products

Automotive

We believe that we are a leader in developing and manufacturing high-quality, high fidelity digitally-
integrated infotainment systems and premium branded audio systems for automobiles.

The automotive market is currently experiencing unprecedented consumer demand for information and
entertainment in the car. We have developed leading technical competencies to address this demand.
These competencies take the form of highly integrated infotainment systems that provide and manage
audio, radio, video, navigation, telephone and climate control through efficient hardware solutions and
scalable software architectures. In fiscal 2006, we supplied infotainment systems for vehicles manufactured
by Mercedes-Benz, BMW, Porsche, Audi, Renault and Land Rover. Our business objective is to maintain
our leadership position in the infotainment business.

We continue to leverage our expertise in the design and manufacture of premium branded audio systems,
as well as the reputation for quality associated with our JBL, Infinity, Harman/Kardon, Mark Levinson
and Lexicon brand names. As a result of our well-established relationships with automobile
manufacturers, our engineers are engaged early in the vehicle design process to develop systems that
optimize acoustic performance and minimize weight and space requirements. Our Infinity branded car
audio systems are offered by DaimlerChrysler’s Chrysler Division as well as Mitsubishi and Hyundai/Kia
(in North America). DaimlerChrysler’s Mercedes-Benz Division, the BMW Group, Land Rover, Porsche,
GM and Saab provide Harman/Kardon branded audio systems in their vehicles. Our premium Mark
Levinson digital audio system is offered by Lexus. Rolls Royce vehicles come standard with a Lexicon

                                                     2
branded audio system. Toyota, the Peugeot/Citroën Group and Hyundai/Kia (in Asia) offer JBL branded
audio systems.

Consumer

In the multimedia market, we offer branded products such as JBL On Stage II,TM JBL Creature II,TM JBL
On Time, JBL RadialTM and Harman/Kardon Soundsticks II.TM Our products add greater functionality for
computers and Apple’s successful iPod as well as other MP3 players. Our new Harman/Kardon Drive +
PlayTM provides full music control and interface along with a highly visible display in automobiles. Music
management allows for choice by artist, album, song, genre, composer and play list. We believe our
products facilitate the easy transfer of music and data from the home to the car and back.

We manufacture loudspeakers under the JBL, Infinity, Harman/Kardon and Revel brand names for the
consumer home audio market. These loudspeaker lines include models designed for two-channel stereo
and multi-channel surround sound applications in the home and in a wide range of performance choices,
including floor standing, bookshelf, powered, low frequency, in-wall, wireless and all-weather as well
as in styles and finishes ranging from high gloss lacquers to genuine wood veneers. The JBL and Infinity
product lines also include car loudspeakers, amplifiers, subwoofers and crossover products sold in the
aftermarket as well as marine speakers intended for use on boats.

We offer a broad range of consumer audio electronics under the Harman/Kardon, Mark Levinson and
Lexicon brand names. Our Harman/Kardon home electronics line includes audio/video receivers
featuring Logic 7, Dolby Digital and DTS surround sound processing capabilities and multi-channel
amplifiers, multi-disc DVD players and CD players. We design and manufacture high-end electronics,
including amplifiers, digital signal processors, compact disc players and transports, DVD transports and
surround sound processors that we market under the renowned Mark Levinson brand. We believe that we
are a leader in the design and manufacture of high-quality home theater surround sound processors and
amplifiers under the Lexicon name. Lexicon was a pioneer in the development of digital signal processors
for the professional audio market and has successfully transferred its professional audio expertise to
produce excellent consumer products.

Professional

Our professional products include loudspeakers and electronic equipment that are marketed under what
we believe are some of the most respected brand names in the industry, including JBL Professional,
Crown, Soundcraft, Lexicon, DigiTech, AKG, BSS, dbx and Studer.

The professional market is increasingly moving to digital technology. We believe that we are a leader in
this market. Our Professional segment derives value from its ability to share research and development,
engineering talent and other digital resources among its business units. Soundcraft, Studer, Crown,
Lexicon, DigiTech, dbx and BSS each have substantial digital engineering resources and work together
to achieve common goals by sharing resources and technical expertise.

Our professional loudspeakers are well known for high-quality and superior sound. JBL Professional
branded products include studio monitors, loudspeaker systems, powered loudspeakers, sound
reinforcement systems, cinema systems, surround sound systems and industrial loudspeakers.

Our professional electronic products are recognized for high quality and reliability. We market these
products on a worldwide basis under various trade names, including Crown, Soundcraft, Lexicon,

                                                     3
DigiTech, AKG, BSS, dbx and Studer. These products are often sold in conjunction with our JBL
Professional loudspeakers and in certain products are integrated into JBL loudspeakers.

We produce sound mixing consoles which range from automated multi-track consoles for professional
recording studios to compact professional mixers for personal recording, home studios and sound
reinforcement. Our consoles are sold to four main market areas: sound reinforcement, recording studios,
broadcast studios and musical instrument dealers. Our mixing consoles are sold primarily under the
Soundcraft and Studer brands. We produce many types of signal processing products, equalizers, and
special effects devices that are used in live sound applications and in recording studios to produce sound
effects and refine final mixes. These products are sold under the Lexicon, DigiTech, dbx and BSS brand
names.

We produce microphones, audio headphones, surround-sound headphones and other professional audio
products, which are marketed under the AKG brand name.

We also produce professional amplifiers and powered loudspeakers under the Crown and JBL brand
names. We believe the integration of loudspeakers and electronics enhances our ability to provide
complete systems solutions to the professional audio market. Our other professional products include
switching systems, digital audio workstations and turnkey broadcasting studio installations marketed
primarily under the Studer brand name.

With our HiQnet network protocol we can configure, connect and control a complete professional sound
system from microphone to speaker on one unified digital network. This system provides enhanced
productivity and facilitates real-time problem diagnosis and correction from a central location.

Manufacturing

We believe that our world-class manufacturing capabilities are essential to maintaining and improving
product quality and performance. Our manufacturing facilities are located in North America, Europe and
Asia.

Our Automotive manufacturing facilities in Europe are located in Germany, the United Kingdom,
Sweden, France and Hungary. Our European facilities are primarily used to manufacture automotive
navigation and infotainment systems and audio systems. In North America, we manufacture loudspeakers
in Indiana, Kentucky and Mexico and manufacture electronics in California, Kentucky and Missouri.

Our Consumer manufacturing facilities are located in California, Massachusetts, Mexico and China. Our
loudspeaker manufacturing capabilities include the production of high-gloss lacquer and wooden veneer
loudspeaker enclosures, wire milling, voice coil winding and the use of computer controlled lathes and other
machine tools to produce precision components.

Our principal Professional facilities in North America include the manufacturing of loudspeakers in
California and electronic products, including amplifiers and effects devices, in Utah and Indiana. European
professional electronics manufacturing includes mixing consoles in the United Kingdom and Switzerland,
professional recording and broadcast equipment in Switzerland and microphones and headphones in Austria.

Our facilities have been designed to emphasize worker safety and compliance with environmental and safety
regulations.



                                                      4
Suppliers

We use externally sourced microchips in many of our products. A significant disruption in our microchip
supply chain and an inability to obtain alternative sources would have a material impact on our
consolidated results of operations.

Several independent suppliers manufacture electronic products designed by Harman/Kardon and certain
Consumer and Professional loudspeakers and electronics. We do not believe the loss of any one of these
suppliers would have a material impact on our consolidated results of operations or consolidated financial
position.

Trademarks and Patents

We market our products under numerous brand names that are protected by both pending and registered
trademarks around the world. Our brands include JBL, Infinity, Harman/Kardon, Lexicon,
Mark Levinson, Revel, Crown, Becker, Soundcraft, DigiTech, AKG, Studer, BSS and dbx.
Our trademark registrations cover use of trademark rights in connection with various products, such as
loudspeakers, speaker systems, speaker system components and other electrical and electronic devices.
We have registered or taken other protective measures for many of these trademarks in substantially all
major industrialized countries. As of June 30, 2006, we had 1,915 trademark registrations and 278 pending
trademark applications around the world. On that date, we also had 1,397 United States and foreign
patents and 2,033 pending patent applications covering various audio, infotainment and software
products.

Seasonality

We experience seasonal fluctuations in sales and earnings. Historically, our first fiscal quarter ended
September 30 is generally the weakest due to automotive model year changeovers and the summer holidays in
Europe. Our sales and earnings may also vary due to customer acceptance of our products, product offerings
by our competitors and general economic conditions, including fluctuations in foreign currency exchange
rates.

Customers/Industry Concentration

We are subject to various risks related to dependence on key customers. Sales to DaimlerChrysler and BMW
accounted for 25 percent and 10 percent, respectively, of our total consolidated net sales for the fiscal year
ended June 30, 2006. Accounts receivable due from DaimlerChrysler and BMW accounted for 20 percent and
7 percent, respectively, of total consolidated accounts receivable at June 30, 2006.

We anticipate that DaimlerChrysler and BMW will continue to account for a significant portion of our net
sales and accounts receivables for the foreseeable future. These automotive customers are not obligated to any
long-term purchase of our products.

The loss of sales to DaimlerChrysler or BMW would have a material adverse effect on our total
consolidated net sales, earnings and financial position. For the fiscal year ended June 30, 2006,
approximately 64 percent of our sales were to automobile manufacturers.

Backlog Orders

We manufacture automotive products and systems on a just-in-time basis and maintain sufficient inventories
of finished goods to fill Consumer and Professional customer orders promptly; therefore we do not consider
                                                      5
the level of backlog to be an important indication of our future performance. Our order backlog was
approximately $31 million at June 30, 2006. We expect to deliver these products within the next twelve
months. Our backlog was approximately $18 million at June 30, 2005.

Warranty Liabilities

We warrant our products to be free from defects in materials and workmanship for a period ranging from one
year to five years from the date of purchase, depending on the business segment and product. The warranty is
a limited warranty, and it may impose certain shipping costs on the customer and exclude deficiencies in
appearance except for those evident when the product is delivered. Dealers and warranty service providers
normally perform warranty service for loudspeakers and electronics in the field, using parts we supply on
an exchange basis. Estimated warranty liabilities are based upon past experience with similar types of
products, the technological complexity of certain products, replacement cost and other factors. We take
these factors into consideration when assessing the adequacy of our warranty provisions for periods still open
to claim.

Competition

The audio industry is fragmented and competitive and includes numerous manufacturers offering audio
products that vary widely in price, quality and distribution methods. Consumer home, multimedia and
mobile aftermarket products are offered through audio specialty stores, discount stores, department stores,
mail order firms and Internet merchants. Automotive and computer manufacturers also offer branded audio
products as options. Music instrument retailers, professional audio dealers, contractors and installers offer
professional products and customers can also purchase these products on a contract bid basis. We concentrate
primarily on the higher-quality, higher-priced segments of the audio market and compete based upon the
strength of our brand names, the quality of our products, our ability to provide integrated systems and our
comprehensive marketing, engineering and manufacturing resources.

In the automotive audio market, we compete with Bose, Pioneer ASK, Foster Electric and Panasonic in the
sale of audio systems to automotive manufacturers and Alpine, Bosch, Panasonic, Siemens VDO, Visteon,
Mitsubishi Electronics, Aisin Seiki and Denso in the sale of electronics and infotainment systems to
automotive manufacturers. We compete based upon the strength of our brand names and the quality of
our products.

We believe our competitive position is enhanced by our technical expertise in designing and integrating
acoustics, navigation, speech recognition and human-machine interfaces into complete infotainment systems
uniquely adapted to the specific requirements of each automobile model.

We believe that we currently have a significant share of the consumer market for loudspeakers, primarily as a
result of the strength of our brand names and our technology. We believe JBL and Infinity are two of the most
recognized loudspeaker brands in the world. By developing our high-end loudspeaker brand, Revel, over the
past several years, we have extended our market position. Our principal competitors in the consumer
loudspeaker market include Bose, Klipsch, Polk Audio, B&W and Boston Acoustics.

Competition in the consumer home electronics market remains intense, dominated by large Asian
manufacturers. This market is characterized by the short life cycle of products and a need for continuous
design and development efforts. Our competitive strategy is to compete in the higher-quality segments of
this market and to continue to emphasize our ability to provide system solutions to customers, including a
combination of loudspeakers, electronics products, integrated surround sound and home theater systems.
Our principal electronic competitors include Yamaha, Sony, Denon, Onkyo, Pioneer and Marantz.
                                                      6
We also compete in the luxury consumer electronics market with our Mark Levinson and Lexicon brands.
Our principal competitors in this high-end market include Krell, McIntosh, Audio Research, Meridian, Linn
and Accuphase.

In the multimedia market, we supply Apple stores and other retailers with JBL and Harman/Kardon speaker
systems that serve Apple’s successful iPod as well as other MP3 players. Our principal competitors for these
products are Bose, Altec Lansing and Klipsch. We also offer Harman/Kardon and JBL speaker systems to
personal computer retailers. In this market, our principal competitors are Creative Labs, Altec Lansing,
Logitech, Klipsch and Cyber Acoustics. Additionally, Harman/Kardon audio systems are built into certain
Toshiba laptops. The new Harman/Kardon Drive + Play mobile product provides full MP3 control and
interface for Apple’s iPod and includes a highly visible display. Our principal competitor in the MP3 mobile
accessory market is Alpine.

The market for professional sound systems is highly competitive. We believe that we have historically held a
leading market position in the professional loudspeaker market and have complemented our professional
loudspeaker line by adding digital professional electronic products and broadcast and recording equipment.
We compete by utilizing our ability to provide systems solutions to meet the complete audio requirements of
our professional customers. With our HiQnet networking protocol software, our professional brand products
can communicate and operate together. We offer products for most professional audio applications.

We compete in the sound reinforcement market using many of our brand names, including JBL
Professional, AKG, Crown, Soundcraft, dbx and BSS. Our principal competitors in the sound
reinforcement market include Telex, Electro Voice, Mackie, QSC, Meyer Sound Laboratories, Sennheiser,
Peavey, Shure, Audio Technica, and Yamaha. Our Studer, AKG, Soundcraft, JBL Professional and Lexicon
branded products compete in the recording and broadcast markets. Principal competitors in these
markets include Yamaha, Sennheiser, Loud Technologies, Inc., Lawo, Harris Corporation, DigiDesign/
M-Audio, Genelec, KRK, TC Electronics, Stagetec and Sony. In the music instrument market, competitors
for our JBL Professional, DigiTech, dbx, Crown, Soundcraft and AKG products include Yamaha, Peavey,
QSC, Shure, Sennheiser, Line 6, Dunlop, Zoom, Audio Technica and Roland. We also compete in the
industrial and architectural sound market. Competitors within this market include Siemens, Peavey and
Tannoy.

We are subject to various Federal, state, local and international environmental laws and regulations,
including those governing the use, discharge and disposal of hazardous materials. We believe that our
facilities are in substantial compliance with current laws and regulations. The cost of compliance with
current environmental laws and regulations has not been, and is not expected to be, material.

Research and Development

Expenditures for research and development were $302.0 million, $222.6 million and $216.9 million for
the fiscal years ended June 30, 2006, 2005 and 2004, respectively.

Number of Employees

At June 30, 2006, we had 11,246 full-time employees, including 5,155 employees located in North America
and 6,091 located outside of North America.




                                                      7
Website Information

Our corporate website is located at www.harman.com. Through our website we make available, free of
charge, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K filed or furnished by the Company pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. Our website also provides access to reports filed by our directors, executive officers
and certain significant shareholders pursuant to Section 16 of the Securities Exchange Act of 1934. In
addition, our Corporate Governance Guidelines, Ethics Code and charters for three committees of our
Board of Directors are available on our website. The information on our website is not incorporated by
reference into this report. In addition, the Securities and Exchange Commission (“SEC”) maintains a
website, www.sec.gov, that contains reports, proxy and information statements and other information
that we file electronically with the SEC.

Item 1A. Risk Factors

You should carefully consider the risks described below and the other information in this report.

Our operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts
or investors, our stock price may decrease significantly.

Our operating results may fluctuate significantly and may not meet our expectations or those of securities
analysts or investors. The price of our stock will likely decline if this occurs. Factors that may cause
fluctuations in our operating results include, but are not limited to, the following:
    •   automobile industry sales and production rates and the willingness of automobile purchasers to
        pay for the option of a premium audio system and/or a multi-function infotainment system;
    •   changes in consumer confidence and spending;
    •   fluctuations in currency exchange rates and other risks inherent in international trade and
        business transactions;
    •   the ability to satisfy contract performance criteria, including technical specifications and due
        dates;
    •   the loss of one or more significant customers, including our automotive manufacturer customers;
    •   competition in the automotive, consumer or professional markets in which we operate;
    •   model-year changeovers in the automotive industry;
    •   changes in general economic conditions and specific market conditions;
    •   our ability to enforce or defend our ownership and use of intellectual property;
    •   our ability to effectively integrate acquisitions;
    •   strikes, work stoppages and labor negotiations at our facilities, or at a facility of one of our
        significant customers; or work stoppages at a common carrier or a major shipping location;
    •   the outcome of pending or future litigation and administrative claims, including patent and
        environmental matters; and
    •   world political stability.
Currency fluctuations may reduce profits on our foreign sales or increase our costs, either of which could
adversely affect our financial results.

A significant amount of our assets and operations are located outside the United States. Consequently,
we are subject to fluctuations in foreign currency exchange rates, especially the Euro. Translation losses

                                                        8
resulting from currency fluctuations may adversely affect the profits from our foreign operations and
have a negative impact on our financial results. In addition, we purchase certain foreign-made products.
Although we hedge a portion of our foreign currency exposure and, due to the multiple currencies
involved in our business, foreign currency positions partially offset and are netted against one another to
reduce exposure, we cannot assure you that fluctuations in foreign currency exchange rates will not make
these products more expensive to purchase. Increases in our cost of purchasing these products could
negatively impact our financial results if we are not able to pass those increased costs on to our customers.

Failure to maintain relationships with our largest customers and failure by our customers to continue to
purchase expected quantities of our products due to changes in market conditions would have an adverse
effect on our operations.

We anticipate that DaimlerChrysler and BMW will continue to account for a significant portion of our
sales for the foreseeable future. However, DaimlerChrysler and BMW are not obligated to any long-term
purchases of our products. The loss of sales to DaimlerChrysler or BMW would have a material adverse
effect on our consolidated sales, earnings and financial position.

Our products may not satisfy shifting consumer demand or compete successfully with competitors’ products.

Our business is based on the demand for audio and video products and our ability to introduce distinctive
new products that anticipate changing consumer demands and capitalize upon emerging technologies.
If we fail to introduce new products, misinterpret consumer preferences or fail to respond to changes in
the marketplace, consumer demand for our products could decrease and our brand image could suffer.
In addition, our competitors may introduce superior designs or business strategies, impairing our
distinctive image and our products’ desirability. If any of these events occur, our sales could decline.

A decrease in discretionary spending would likely reduce our sales.

Our sales are dependent on discretionary spending by consumers, which may be adversely impacted by
economic conditions affecting disposable consumer income and retail sales. In addition, our sales of
audio, electronic and infotainment products to automotive customers are dependent on the overall
success of the automobile industry, as well as the willingness of automobile purchasers to pay for the
option of a premium branded automotive audio system or a multi-function digital infotainment system.

Our business could be adversely affected if we are unable to obtain raw materials and components from our
suppliers on favorable terms.

We are dependent upon third party suppliers, both in the United States and other countries, for various
components, parts, raw materials and finished products. Some of our suppliers may produce products
that compete with our products. We use externally sourced microchips in many of our products.
A significant disruption in our supply chain and an inability to obtain alternative sources could have
a material impact on our consolidated results of operations.

Our business could be adversely affected by a strike or work stoppage at one of our manufacturing plants or
at a facility of one of our significant customers or at a common carrier or major shipping location.

One of our manufacturing facilities in the United States operates under a collective bargaining agreement,
which was renewed in fiscal 2004. The current contract is scheduled to expire in March 2009. Certain of
our automotive customers are unionized and may incur work stoppages or strikes. A work stoppage at our
facilities or those of our automotive customers could have a material adverse effect on our consolidated
                                                      9
sales, earnings and financial condition. In addition, a work stoppage at a common carrier or a major
shipping location could also have a material adverse effect on our consolidated sales, earnings and
financial condition.

We may lose market share if we are unable to compete successfully against our current and future
competitors.

The audio and video product markets that we serve are fragmented, highly competitive, rapidly changing
and characterized by intense price competition.

Many manufacturers, large and small, domestic and foreign, offer audio and video systems that vary
widely in price and quality and are marketed through a variety of channels, including audio and video
specialty stores, discount stores, department stores, mail order firms, and the Internet. Some of our
competitors have financial and other resources greater than ours. We cannot assure you that we will
continue to compete effectively against existing or new competitors that may enter our markets. We also
compete indirectly with automobile manufacturers that may improve the quality of original equipment
audio and electronic systems, reducing demand for our aftermarket mobile audio products, or change the
designs of their cars to make installation of our aftermarket products more difficult or expensive.

If we do not continue to develop, introduce and achieve market acceptance of new and enhanced products,
our sales may decrease.

In order to increase sales in current markets and gain entry into new markets, we must maintain and
improve existing products, while successfully developing and introducing new products. Our new and
enhanced products must respond to technological developments and changing consumer preferences.
We may experience difficulties that delay or prevent the development, introduction or market acceptance
of new or enhanced products. Furthermore, despite extensive testing, we may be unable to detect
and correct defects in some of our products before we ship them. Delays or defects in new product
introduction may result in loss of sales or delays in market acceptance. Even after introduction, our new
or enhanced products may not satisfy consumer preferences and product failures may cause consumers
to reject our products. As a result, these products may not achieve market acceptance. In addition, our
competitors’ new products and product enhancements may cause consumers to defer or forego purchases
of our products.

Our operations could be harmed by factors including political instability, natural disasters, fluctuations in
currency exchange rates and changes in regulations that govern international transactions.

The risks inherent in international trade may reduce our international sales and harm our business and
the businesses of our distributors and suppliers. These risks include:
    •   changes in tariff regulations;
    •   political instability, war, terrorism and other political risks;
    •   foreign currency exchange rate fluctuations;
    •   establishing and maintaining relationships with local distributors and dealers;
    •   lengthy shipping times and accounts receivable payment cycles;
    •   import and export licensing requirements;
    •   compliance with foreign laws and regulations, including unexpected changes in taxation and
        regulatory requirements;

                                                       10
    •   greater difficulty in safeguarding intellectual property than in the United States; and
    •   difficulty in staffing and managing geographically diverse operations.
These and other risks may increase the relative price of our products compared to those manufactured in
other countries, reducing the demand for our products.

If we are unable to enforce or defend our ownership and use of our intellectual property, our business may
decline.

Our future success will depend, in substantial part, on our intellectual property. We seek to protect our
intellectual property rights, but our actions may not adequately protect the rights covered by our patents,
patent applications, trademarks and other proprietary rights and prosecution of our claims could be time
consuming and costly. In addition, the intellectual property laws of some foreign countries do not protect
our proprietary rights, as do the laws of the United States. Despite our efforts to protect our proprietary
information, third parties may obtain, disclose or use our proprietary information without our
authorization, which could adversely affect our business. From time to time, third parties have alleged that
we infringe their proprietary rights. These claims or similar future claims could subject us to significant
liability for damages, result in the invalidation of our proprietary rights, limit our ability to use infringing
intellectual property or force us to license third-party technology rather than dispute the merits of any
infringement claim. Even if we prevail, any associated litigation could be time consuming and expensive
and could result in the diversion of our time and resources.

Covenants in our debt agreements could restrict our operations.

Our revolving credit facility contains certain provisions that could restrict our operating and financing
activities. They restrict our ability to, among other things:
    •   create or assume liens;
    •   enter into sale-leaseback transactions; and
    •   engage in mergers or consolidations.
Because of the restrictions on our ability to create or assume liens, we may have difficulty securing
additional financing in the form of additional indebtedness. In addition, our revolving credit facility
contains other and more restrictive covenants, including financial covenants that will require us to achieve
specified financial and operating results and maintain compliance with specified financial ratios. We may
have to curtail some of our operations to maintain compliance with these covenants.
If we fail to comply with the covenants contained in our debt agreements, the related debt incurred under
those agreements could be declared immediately due and payable, which could also trigger a default under
other agreements.

Our ability to meet the covenants or requirements in our credit facilities may be affected by events beyond
our control, and we cannot assure you that we will satisfy these covenants and requirements. A breach of
these covenants or our inability to comply with the financial ratios, tests or other restrictions could result
in an event of default under our revolving credit facility. Upon the occurrence of an event of default
under our revolving credit facility, the lenders could elect to declare all amounts outstanding under our
revolving credit facility, together with accrued interest, to be immediately due and payable. If the payment
of our indebtedness is accelerated, we cannot assure you that we will be able to make those payments or
borrow sufficient funds from alternative sources to make those payments. Even if we were to obtain
additional financing, that financing may be on unfavorable terms.

                                                      11
Harman International is a holding company with no operations of its own and therefore our cash flow and
ability to service debt is dependent upon distributions from our subsidiaries.

Our ability to service our debt and pay dividends is dependent upon the operating earnings of our
subsidiaries. The distribution of those earnings, or advances or other distributions of funds by those
subsidiaries to Harman International, all of which could be subject to statutory or contractual restrictions,
are contingent upon the subsidiaries’ earnings and are subject to various business considerations.

Any of the foregoing factors could have a material adverse effect on our business, results of operations and
financial condition. In light of these risks and uncertainties, there can be no assurance that the results and
events contemplated by the forward-looking statements contained in this report will in fact transpire.

Item 1B. Unresolved Staff Comments

None.




                                                      12
Item 2. Properties

Our corporate headquarters are located at 1101 Pennsylvania Avenue, N.W., Washington, D.C. 20004.

Certain information regarding our principal facilities are described in the table below.
                                                                          Owned         Percentage
Location                       Segment             Size (Sq. Ft.)        or leased      utilization
Northridge, California         Automotive
                               Consumer
                               Professional             589,000            Leased              96%
Ittersbach, Germany            Automotive               561,000           Owned              100%

Straubing, Germany             Automotive               235,000           Owned              100%
Elkhart, Indiana               Professional             223,000           Owned                86%
Chateau du Loir,               Automotive
 France                        Consumer                 221,000           Owned                90%
Martinsville, Indiana          Automotive               221,000           Owned              100%

Rancho Cucamonga,
 California                    Professional             212,000            Leased            100%
Worth-Schaitt,
 Germany                       Automotive               204,000           Owned              100%
Tijuana, Mexico                Consumer                 198,000            Leased              98%
Vienna, Austria                Professional             193,000            Leased            100%
Potters Bar,
 United Kingdom                Professional             160,000            Leased            100%
Franklin, Kentucky             Automotive               152,000           Owned              100%
Sandy, Utah                    Professional             127,000            Leased            100%

Bridgend,
 United Kingdom                Automotive               125,000            Leased            100%
Szekesfehervar,
  Hungary                      Automotive               117,000           Owned              100%
Juarez, Mexico                 Automotive               109,000            Leased              90%
Regensdorf,
 Switzerland                   Professional             108,000            Leased            100%


We also own or lease other facilities which are not considered principal properties. We believe that our
facilities are suitable and adequate for our present needs and suitable additional or substitute facilities will
be available, if required.




                                                       13
Item 3. Legal Proceedings
At June 30, 2006, we were involved in several legal actions. The outcome of these legal actions cannot
be predicted with certainty; however, management, based upon advice from legal counsel, believes such
actions are either without merit or will not have a material adverse effect on our financial position or
results of operations. In fiscal 2005, we recorded a $6 million liability for probable unasserted claims.
There was no change in the status of these claims at June 30, 2006.

Item 4. Submission of Matters to a Vote of Security Holders and Executive Officers of the Registrant
Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Executive officers are elected annually by our Board of Directors and hold office at the pleasure of the
Board until the next annual election of officers or until their successors are elected and qualified.
Each of our current executive officers is identified below together with information about each officer’s
age, position and employment history for the last five years.

 Name                       Position                                                                    Age
 Sidney Harman              Executive Chairman of the Board                                                 88
 Bernard A. Girod           Vice Chairman of the Board of Directors and Chief Executive Officer             64
 Erich A. Geiger            Executive Vice President and Chief Technology Officer                           59
 Kevin L. Brown             Executive Vice President – Chief Financial Officer and                          46
                             Assistant Secretary
 William S. Palin           Vice President – Controller                                                     64
 Sandra B. Robinson         Vice President – Financial Operations and Chief Accounting Officer              47
 Edwin C. Summers           Vice President – General Counsel and Secretary                                  59
 Floyd E. Toole             Vice President – Acoustics                                                      68

Sidney Harman has been Executive Chairman of the Board since July 2000 and served as Chairman of the
Board and as a director of our company since 1980. Dr. Harman also served as our Chief Executive Officer
from 1980 to 1998.

Bernard A. Girod joined our company in 1986. Mr. Girod has been Vice Chairman of the Board since
July 2000, Chief Executive Officer from 1998 to May 2006 and a director of our Company since 1993.
He resumed the role of Chief Executive Officer in August 2006. Mr. Girod also served as President from
1994 to 1998, Chief Operating Officer from 1993 to 1998, Secretary from 1992 to 1998 and Chief Financial
Officer from 1986 to 1995 and from 1996 to 1997.

Erich A. Geiger joined our company in 1996 as Managing Director of Harman/Becker GmbH. He was
named Chief Technology Officer of Harman International in 2003. In 2004, Dr. Geiger was named
Executive Vice President and Chief Technology Officer of Harman International and Executive Chairman
of Harman/Becker Automotive Systems. The Board of Directors has appointed Dr. Geiger Chief Strategy
and Technology Officer effective October 1, 2006.

Kevin L. Brown joined our company in August 2003 as the Chief Financial Officer of Harman/Becker
Automotive Systems. Mr. Brown was promoted to Executive Vice-President and Chief Financial Officer in
August 2006. He has served as Vice President, Chief Financial Officer and Assistant Secretary of Harman

                                                     14
International since July 2005. Prior to joining our company, Mr. Brown served as Senior Vice President
and Chief Financial Officer of Donnelly Corporation, an automotive parts supplier, from April 2001 to
March 2003.

William S. Palin has served as Vice President – Controller of our company since March 1994.

Sandra B. Robinson has been employed with our company since 1984 and has served as Vice President –
Financial Operations since November 1992. Ms. Robinson became Chief Accounting Officer in July 2005.

Edwin C. Summers has been employed with our company as Vice President, General Counsel and
Assistant Secretary since July 1998. He became Secretary in November 2005.

Floyd E. Toole has been employed with our company as Vice President – Acoustics since November 1991.

Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

Our Common Stock is listed on the New York Stock Exchange and is reported on the New York Stock
Exchange Composite Tape under the symbol HAR. As of August 31, 2006, there were approximately
150 record holders of our Common Stock.

The table below sets forth the reported high and low sales prices at the market close for our Common
Stock, as reported on the New York Stock Exchange, for each quarterly period for fiscal years ended
June 30, 2006 and 2005.
                                              Fiscal 2006                      Fiscal 2005
 Market Price                                 High      Low                    High      Low
 First quarter ended September 30       $    108.28        79.92              107.75     77.97
 Second quarter ended December 31            105.25        94.81              130.72    103.47
 Third quarter ended March 31                115.85        95.52              128.15     84.45
 Fourth quarter ended June 30                109.18        80.30               91.14     70.25
We paid cash dividends during fiscal years 2006 and 2005 of $.05 per share, with a dividend of $.0125 per
share paid in each of the four quarters.




                                                      15
The following table sets forth our repurchases of Common Stock for each month in the fourth quarter of
fiscal 2006:
                                                                           Total number          Maximum
                                                                                of shares        number of
                                                                            purchased as         shares that
                                                                                  part of        may yet be
                                            Total        Average                 publicly        purchased
                                         number             price            announced            under the
                                        of shares        paid per                plans or          plans or
 Period                                purchased            share              programs           programs

 April 1, 2006 – April 30, 2006               ---              ---                   ---         4,199,218
 May 1, 2006 – May 31, 2006              249,400            $83.38              249,400          3,949,818
 June 1, 2006 – June 30, 2006            640,000             82.51              640,000          3,309,818
                                         889,400             82.75              889,400          3,309,818 (1)

(1) Our share repurchase program was first publicly announced on June 16, 1998. In August 2005, the
    Board authorized the purchase of up to an additional four million shares, bringing the total authorized
    to 20 million shares. Total shares repurchased through June 30, 2006 were 16,690,182.
    For a description of limitations on the payment of dividends, see Management’s Discussion and Analysis of
    Financial Condition and Results of Operations – Financial Condition included in Item 7 of Part II of this
    report.


Item 6. Selected Financial Data

The following table summarizes certain selected financial data that should be read in conjunction with the
consolidated financial statements and accompanying notes thereto for the fiscal year ended June 30, 2006
included in this report.

                                                                      Years Ended June 30,
(In thousands except per share data)                 2006            2005        2004             2003            2002

Net sales                                     $3,247,897       3,030,889      2,711,374     2,228,519         1,826,188
Operating income                              $ 397,241          350,981        254,465       166,894           103,221
Income before income taxes                    $ 376,187          335,337        227,520       142,471            80,177
Net income                                    $ 255,295          232,848        157,883       105,428            57,513
Diluted earnings per share (a)                $     3.75            3.31           2.27          1.55              0.85
Weighted average shares outstanding
  – diluted (a)                                   68,105          70,399         69,487        68,048            67,806
Total assets                                  $2,354,661       2,187,203      1,988,810     1,703,658         1,480,280
Total debt                                    $ 197,554          333,917        394,925       503,068           474,679
Shareholders’ equity                          $1,228,164       1,060,948        874,996       655,785           526,629
Dividends per share (a)                       $     0.05            0.05           0.05          0.05              0.05



(a) Share and per share data has been adjusted to reflect the two-for-one stock split in November 2003.




                                                         16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the information presented in other sections of this Annual
Report on Form 10-K, including “Item 1. Business,” “Item 6. Selected Financial Data,” and “Item 8. Financial
Statements and Supplementary Data.” This discussion contains forward-looking statements which are based
on our current expectations and industry experience, as well as our perception of historical trends, current
market conditions, including customer acceptance of our new products, current economic conditions, expected
future developments, including foreign currency exchange rates, and other factors that we believe are
appropriate under the circumstances. These statements involve risks and uncertainties that could cause actual
results to differ materially from those suggested in the forward-looking statements. See “Risk Factors” included
in Part 1, Item 1A. of this report.

We begin this discussion with an overview of our company to give you an understanding of our business
and the markets we serve. We then discuss our critical accounting policies. This is followed by a discussion
of our results of operations for the fiscal years ended June 30, 2006, 2005 and 2004. We include in this
discussion an analysis of certain significant year-to-year variances included in our results of operations.
We also provide specific information regarding our three reportable business segments: Automotive,
Consumer and Professional. We then discuss our financial condition at June 30, 2006 with a comparison
to June 30, 2005. This section contains information regarding our liquidity and capital resources, cash
flows and equity balances. We complete our discussion with a business outlook for future periods.

Overview

We design, manufacture and market high-quality, high fidelity audio products and electronic systems for
the automotive, consumer and professional markets. We have developed, both internally and through a
series of strategic acquisitions, a broad range of product offerings sold under renowned brand names in
our principal markets. Our three reportable business segments, Automotive, Consumer and Professional,
are based on the end-user markets we serve.

Automotive designs, manufactures and markets audio, electronic and infotainment systems for vehicle
applications. Our systems are generally shipped directly to our automotive customers for factory
installation. Infotainment systems are a combination of information and entertainment components
with features including or controlling GPS navigation, traffic information, cellular phone service, wireless
Internet access, security, climate control, backup camera, digital audio playback and rear seat
entertainment. These systems are increasingly developed using scaleable software allowing us to better
serve luxury-range vehicles through the entry-level. Automotive also produces aftermarket personal
navigation devices that are currently sold in Europe.

Consumer designs, manufactures and markets audio, video and electronic systems for home, mobile
and multimedia applications. Home product applications include systems to provide high-quality audio
throughout the home and to enhance in-home video systems such as home theatres. Our aftermarket
mobile products, including in-vehicle iPod adaptors, deliver audio entertainment in the vehicle.
Our multimedia products include accessories for portable electronic devices such as the iPod and
other MP3 players. Our consumer systems are primarily distributed through retail outlets.

Professional designs, manufactures and markets loudspeakers and electronic systems used by audio
professionals in concert halls, stadiums, airports and other public spaces. We also create products for
recording, broadcast, cinema and music reproduction applications. These products are increasingly linked


                                                       17
by our HiQnet network protocol that provides a central digital network that allows audio professionals to
control a complex system from a central location.

Our products are sold worldwide, with the largest markets being the United States and Germany. In the
United States, our primary manufacturing facilities are located in California, Indiana, Kentucky and Utah.
Outside of the United States, we have significant manufacturing facilities in Germany, Austria, the United
Kingdom, Mexico, Hungary, France and Switzerland. Our businesses operate using local currencies.
Therefore, we are subject to currency fluctuations that are partially mitigated by the fact that we purchase
raw materials and supplies locally when possible. We are especially affected by changes in Euro exchange
rates since a significant percentage of our sales are made in Euro denominated countries.

We experience seasonal fluctuations in sales and earnings. Historically, our first quarter ending September
30 is generally the weakest due to automotive model changeovers and the summer holidays in Europe.
Our sales and earnings may also vary due to customer acceptance of our products, product offerings by
our competitors and general economic conditions, including fluctuations in foreign currency exchange
rates.

In fiscal 2006, we achieved record sales and earnings for the fifth consecutive year. Each of our three
reportable business segments produced improved results compared to the prior year. These results were
achieved despite unfavorable foreign currency translation due to the strengthening of the U.S. dollar
versus the Euro. Our balance sheet at June 30, 2006 was strengthened by repurchasing a substantial
amount of our outstanding senior notes that were due in February and July 2007. We also repurchased a
substantial number of shares of our common stock in fiscal 2006. During the fourth quarter, we initiated a
restructuring program to increase efficiency in our manufacturing and engineering organizations.

Critical Accounting Policies

The methods, estimates and judgments we use in applying our accounting policies, in conformity with
generally accepted accounting principles in the United States of America (“GAAP”), have a significant
impact on the results we report in our consolidated financial statements. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the
circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions. Our accounting policies and recent
accounting pronouncements are more fully described in Note 1, Summary of Significant Accounting
Policies, which is located in Item 8 of Part II, Consolidated Financial Statements and Supplementary Data.
However, we believe the following policies merit discussion due to their higher degree of judgment,
estimation, or complexity.

Allowance for Doubtful Accounts

Our products are sold to customers in many different markets and geographic locations. Methodologies
for estimating the allowance for doubtful accounts are primarily based on specific identification of
account balances deemed to be uncollectible. Historical write-off experience is also employed to validate
the adequacy of account balances. We must make judgments and estimates regarding account receivables
that may become uncollectible. These estimates affect our allowance for doubtful accounts and results of
operations. We base these estimates on many factors including historical collection rates, the financial
stability and size of our customers as well as the markets they serve and our analysis of accounts receivable
aging. Our judgments and estimates regarding collectibility of account receivables have an impact on our
consolidated financial statements.
                                                      18
Inventory Valuation

The valuation of inventory requires us to make judgments and estimates regarding excess, obsolete or
damaged inventories including raw materials, finished goods and spare parts. Our determination of
adequate reserves requires us to analyze the aging of inventories and the demand for spare parts and to
work closely with our sales and marketing staff to determine future demand for our products. We make
these evaluations on a regular basis and adjustments are made to the carrying value of inventories as
needed. These estimates and the methodologies that we use have an impact on our consolidated financial
statements.

Goodwill

We perform a goodwill impairment test on an annual basis. At June 30, 2006, our goodwill balance of
$381.2 million was not impaired. We made this determination based upon a valuation of our reporting
units, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other
Intangible Assets. The valuation took into consideration various factors such as our historical performance,
future discounted cash flows, performance of our competitors and overall market conditions. We cannot,
however, predict the occurrence of events that might adversely affect the reported value of goodwill.
These events may include, but are not limited to, strategic decisions made in response to economic and
competitive conditions, the impact of the economic environment on our customer base, or a material
negative change in our relationships with significant customers. See Note 4, Goodwill, of our consolidated
financial statements for additional information regarding our goodwill balance and annual impairment
test.

Pre-Production and Development Costs

We incur pre-production and development costs primarily related to infotainment systems that we
develop for automobile manufacturers pursuant to long-term supply agreements. Portions of these costs
are reimbursable under the separate agreements and are recorded as unbilled costs on our balance sheet in
other current assets and other assets. We believe that the terms of our supply contracts and our established
relationships with these automobile manufacturers reasonably assure that we will collect the reimbursable
portions of these contracts. Accounting for development costs under the percentage-of-completion
method requires us to make estimates of costs to complete projects. We review these estimates on a
quarterly basis. Unforeseen cost overruns or difficulties experienced during development could cause
losses on these contracts. Such losses are recorded once a determination is made that a loss will occur.
These estimates and the methodologies that we use have an impact on our consolidated financial
statements.

Warranty Liabilities

We warrant our products to be free from defects in materials and workmanship for a time period ranging
from one year to five years from the date of purchase, depending on the business segment and product.
These warranties require us to make estimates regarding the amount and costs of warranty repairs we
expect to make over a period of time. Several factors influence this estimate including historical analysis of
warranty repair by product category, the technological complexity of certain products, replacement costs
and other factors. The estimates we use have an impact on our consolidated financial statements.




                                                      19
Income Taxes

Deferred income tax assets or liabilities are computed based on the temporary differences between the
financial statement and income tax basis of assets and liabilities using the statutory marginal income tax
rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses
or credits are based on the changes in the deferred income tax assets or liabilities from period to period.
We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more
likely than not to be realized. In determining the need for, and amount of, a valuation allowance, we
consider our ability to forecast earnings, future taxable income, carryback losses, if any, and tax planning
strategies. We believe the estimate of our income tax assets, liabilities and expenses are “critical accounting
estimates” because if the actual income tax assets, liabilities and expenses differ from our estimates the
outcome could have a material impact on our results of operations.

Stock-Based Compensation

On July 1, 2005, we adopted SFAS No. 123R, Accounting for Stock-Based Compensation, using the modified
prospective method. Accordingly, prior period amounts presented herein have not been restated to reflect
the adoption of SFAS No. 123R. Prior to fiscal 2006, we used a fair value based method of accounting for
share-based compensation provided to our employees in accordance with SFAS No. 123. The adoption of
this revised standard did not have a material impact on our results of operations as we have recorded stock
compensation expense on a fair value basis for all awards granted on or after July 1, 2002. As of June 30,
2006, there was $2.2 million of total unrecognized compensation cost related to nonvested restricted stock
compensation arrangements granted under the plans. This cost is expected to be recognized over a
weighted-average period of 2.6 years. The revised standard did require certain changes in our calculations
and disclosures. See Note 11, Stock Option and Incentive Plan, to our consolidated financial statements
included in this report for additional information regarding our stock-based compensation.

Results of Operations

Sales

Fiscal 2006 net sales were a record $3.248 billion, an increase of 7 percent compared to the prior year.
The unfavorable effects of foreign currency translation reduced fiscal 2006 net sales by approximately
$85 million during the year. Exclusive of foreign currency, net sales were 10 percent higher than last
year. The growth in net sales was primarily due to higher sales of infotainment systems to automotive
customers, strong sales of multimedia products in the consumer market, and increased sales in the
professional market strengthened by our HiQnet protocol providing a digital network linking separate
audio products.

We currently expect fiscal 2007 net sales to increase approximately 7 percent supported by sales growth in
all three of our business segments. Automotive net sales will increase due to higher shipments of audio
and infotainment systems to an expanding automotive platform base. We will begin to ship new systems
during fiscal 2007, and accelerating in fiscal years 2008 and 2009, to Chrysler, Hyundai, Peugeot/Citroën
and BMW. We also expect higher automotive aftermarket sales of personal navigation devices in Europe.
We believe Consumer net sales will increase primarily due to the introduction of new products for home,
mobile and multimedia applications. These products include accessories for digital music players such
as the iPod, personal navigation devices, and system-centric media solutions for home applications.
Professional net sales are expected to grow primarily due to new product introductions incorporating the
HiQnet networking protocol.
                                                      20
Net sales in fiscal 2005 increased 12 percent above the prior year. The effects of foreign currency
translation contributed approximately $126 million to the increase compared to the prior year.
The increase in fiscal 2005 net sales, compared to fiscal 2004, was primarily due to higher sales of audio,
electronic and infotainment systems to automotive customers. Strong sales of multimedia products also
contributed to our net sales growth.

We present below a summary of our net sales by reportable business segment:

 ($000s omitted)                Fiscal 2006                  Fiscal 2005                   Fiscal 2004
 Automotive           $ 2,236,379              69%     2,125,566            70%      1,873,047            69%
 Consumer                 494,230              15%       418,347            14%        356,611            13%
 Professional             517,288              16%       486,976            16%        481,716            18%
 Total                $ 3,247,897             100%     3,030,889           100%      2,711,374           100%

Automotive – Automotive net sales grew 5 percent in fiscal 2006 compared to the prior year.
The unfavorable effects of foreign currency translation reduced fiscal 2006 net sales by $70 million during
the year. Exclusive of foreign currency, net sales were 9 percent higher than last year. The net sales growth
was primarily due to the success of our infotainment system for the new Mercedes-Benz S-Class. Also in
Europe, net sales to Audi were higher due to sales to support the new Q7 platform and increased
shipments for the A6 compared to last year. Sales to Porsche and Range Rover were also higher than the
prior year and sales to BMW were slightly lower than the prior year. Strong sales of our new aftermarket
navigation product, Traffic Assist, also contributed to the sales growth. In North America, we had higher
sales to Toyota, Lexus and Hyundai/Kia, offset by lower sales to Chrysler. We expect sales to Chrysler to
increase in future periods as we begin shipping infotainment systems to support new platforms during
fiscal 2007 and accelerating in fiscal 2008.

In fiscal 2005, Automotive net sales increased $253 million over the prior year, an increase of 13 percent.
The effects of foreign currency translation contributed approximately $106 million to fiscal 2005 net sales.
The strong sales growth during fiscal 2005 was primarily due to higher sales of infotainment systems to
Audi for their new A6 platform. Net sales to Mercedes-Benz and Porsche were also higher than the prior
year. Net sales to BMW in fiscal 2005 were lower due to the prior year launch of a revised 5-Series
platform, which included our infotainment system. Our fiscal 2004 shipments for the BMW 5- Series
exceeded our expectations due to the inability of a competitor to meet their obligations for the program.
In North America, we had higher fiscal 2005 sales of Mark Levinson digital audio systems to Lexus and
increased sales of JBL branded audio systems to Toyota, compared to fiscal 2004. Fiscal 2005 net sales to
Chrysler, Hyundai and Mitsubishi were below the previous year.

Consumer – Consumer net sales were 18 percent higher in fiscal 2006 compared to the prior year.
The unfavorable effects of foreign currency translation reduced fiscal 2006 net sales by $9 million during
the year. The sales growth was primarily due to continued strong demand in the United States and Europe
for our multimedia products, especially the JBL On Stage and On Tour, which are accessories for the
Apple iPod. Sales of consumer products for home applications including Harman/Kardon electronics and
JBL and Infinity loudspeakers were also higher compared to the prior year, partially offset by slightly lower
sales of high-end audio systems. New product introductions for mobile applications also resulted in
higher sales compared to the prior year.

Fiscal 2005 sales were $62 million higher than the prior year, an increase of 17 percent. Foreign currency
translation contributed approximately $12 million to fiscal 2005 net sales. The significant sales increase
                                                     21
was primarily due to strong sales of our multimedia products. Sales of these products were strong in both
the United States and Europe. Specialty Group net sales, which include our high-end electronics and
loudspeakers for home audio systems, also increased over the prior year.

Professional – Professional net sales increased 6 percent in fiscal 2006 compared to the prior year.
The unfavorable effects of foreign currency translation reduced fiscal 2006 net sales by $6 million during
the year. Higher sales of JBL Professional, Crown and Harman Music Group products were partially
offset by lower sales of AKG and Mixer Group products. Our professional business units benefited from
an increased number of products that are enabled with the HiQnet networking protocol. AKG and Mixer
Group net sales were lower due to our decision to concentrate on a smaller number of higher-margin core
products.

In fiscal 2005, Professional net sales were slightly higher than the previous year. Foreign currency
translation contributed approximately $9 million to the increase in fiscal 2005 net sales. Professional sales
were adversely affected by our decision in fiscal 2004 to exit AKG’s cellular telephone microphone capsule
business. Exclusive of AKG, our professional business units reported a $45 million increase in net sales
over fiscal 2004, or 12 percent.

Gross Profit

Gross profit margin increased 1.5 percentage points in fiscal 2006 to 35.5 percent. The increase was due
to gross margin improvements across all of our reportable business segments. Each of our three business
segments was able to leverage fixed factory costs against higher sales. Our restructuring program, initiated
during the fourth quarter, did not affect our gross profit margins since the efficiencies will primarily be
achieved through workforce reductions. The costs associated with the workforce reductions are reported
in our selling, general and administrative expenses. The restructuring program is discussed in more detail
under the caption, Selling, General and Administrative Expenses. We presently expect that gross margins
will remain relatively consistent through the 2007 fiscal year.

Fiscal 2005 gross margin increased 1.2 percentage points compared to fiscal 2004. The improvement was
primarily due to substantial Consumer and Professional gross margin improvements, partially offset by
lower Automotive gross profit margins.

A summary of our gross profit by reportable business segment is presented below:
                                             Percent                       Percent                     Percent
                                  Fiscal      of net             Fiscal     of net          Fiscal      of net
($000s omitted)                    2006         sales             2005        sales          2004         sales
Automotive                $   803,906         35.9%            738,172      34.7%        666,119       35.6%
Consumer                      161,458         32.7%            125,557      30.0%         79,559       22.3%
Professional                  193,129         37.3%            172,973      35.5%        147,938       30.7%
Other/Unallocated              (5,923)           ---            (5,000)        ---        (5,024)         ---
Total                     $ 1,152,570         35.5%          1,031,702      34.0%        888,592       32.8%

Automotive – Automotive gross profit margin increased 1.2 percentage points in fiscal 2006 compared to
the prior year. The increase is primarily due to leveraging fixed factory costs against the 5 percent increase
in net sales in fiscal 2006. We also incurred lower warranty costs in fiscal 2006, which benefited our gross
profit margins. The improvement in gross profit margin occurred despite continuing capital investments
to facilitate significant new audio and infotainment systems for automotive platforms that will launch
during fiscal 2007 and accelerate in fiscal years 2008 and 2009.

                                                        22
Gross profit margin decreased 0.9 percentage points in fiscal 2005 compared to the prior year.
The decrease from fiscal 2004 to fiscal 2005 primarily related to favorable material pricing in fiscal 2004
and our costs in fiscal 2005 to meet the needs of new infotainment system programs for automotive
customers. These investments included construction of a factory in Missouri that began manufacturing
systems for Chrysler in late fiscal 2006.

Consumer – Fiscal 2006 Consumer gross profit margin improved 2.7 percentage points from a year ago.
The improvement is primarily due to increased sales of high-margin multimedia products, including the
JBL On Stage and On Tour, and the leveraging of fixed factory costs against an 18 percent increase in
Consumer sales compared to the prior year. Warranty costs were lower in fiscal 2006 due primarily to
costs incurred last year to extend warranty periods on certain products and to replace a faulty chip in one
of our products.

The gross profit margin increased 7.7 percentage points in fiscal 2005 compared to fiscal 2004.
The increase was primarily due to strong sales of higher margin multimedia products. Gross profit margin
was negatively affected in fiscal 2004 due to restructuring costs at our Specialty Group. During fiscal 2004
we also closed a factory in Europe and moved production to our other manufacturing facilities.

Professional – Professional gross profit margin increased 1.8 percentage points in fiscal 2006.
The improvement was primarily due to lower factory overhead costs and improved factory efficiencies,
leveraged against higher sales. AKG and our mixing console businesses have made significant progress
over the past year to increase manufacturing efficiencies and concentrate on selling higher margin core
products. In prior years, these business units have incurred substantial costs to improve factory operations
and eliminate lower margin products.

Fiscal 2005 gross profit margin increased 4.8 percentage points compared to the prior year.
The improvement was partially due to our decision in fiscal 2004 to exit the lower margin cellular
telephone capsule business. We also incurred significant costs in fiscal 2004 to initiate the consolidation
of our European mixing console operations and to restructure our AKG business. Gross profit margins
improved at JBL Professional, Crown and Harman Music Group due to higher sales of more profitable
products and improved efficiencies at our factories manufacturing professional products.

Selling, General and Administrative Expenses

Fiscal 2006 selling, general and administrative (“SG&A”) expenses were 23.3 percent of net sales, an
increase of 0.8 percentage points compared to last year. Excluding restructuring charges, SG&A expenses
were 23.0 percent of net sales. The increase is primarily due to higher research and development costs
(“R&D”) to support significant new automotive infotainment system programs that will begin production
during fiscal 2007. These programs include new systems for Chrysler, Hyundai, Peugeot/Citroën and
BMW. R&D costs were $302.0 million in fiscal 2006, or 9.3 percent of net sales. In fiscal 2005, R&D costs
were $222.6 million, or 7.3 percent of sales. SG&A expenses also include employee compensation and
benefit costs. We have recorded stock-based compensation expense under the fair value based method
since fiscal 2003. Stock option expense in fiscal 2006 was $16.6 million compared to $14.3 million in fiscal
2005. Stock option expense in fiscal 2004 was $10.9 million. In fiscal 2007, we believe SG&A expenses, as a
percentage of sales, will approximate fiscal 2006.

Our fiscal 2006 SG&A expenses include $9.5 million of costs related to our restructuring program
initiated during the fourth quarter. We presently expect to record an additional $6.5 million, for total
restructuring costs of $16.0 million, in future periods to complete our previously announced restructuring
                                                      23
program. This program is designed to increase efficiencies in our manufacturing facilities and to realign
our engineering organization. Over the past several years, our company has grown considerably due
primarily to market acceptance of our infotainment systems developed for automotive customers.
This growth required us to add manufacturing capacity and to internally develop and acquire additional
engineering resources. In order for us to prepare for the next generation of infotainment systems for
automakers and other products, we decided to realign these resources to meet the changing needs and
demands of our customers. Since our restructuring program was initiated during the fourth quarter of
fiscal 2006, the amount of cash paid under the restructuring program in fiscal 2006 was minimal.

In fiscal 2005, SG&A expenses were 22.5 percent of net sales, which was 0.9 percentage points lower than
the prior year. The decrease primarily related to lower R&D costs, as a percentage of sales. R&D costs were
$222.6 million in fiscal 2005, or 7.3 percent of net sales. In fiscal 2004, R&D costs were $216.9 million, or
8.0 percent of sales. The decrease is due to lower costs incurred for infotainment systems for automotive
customers, partially offset by higher costs to develop consumer retail products and the acquisition of QNX
Software Systems, a developer of automotive operating systems. SG&A expenses, as a percentage of sales,
also decreased due to better control of general management, selling and marketing costs during the year.

Below is a summary of our SG&A expenses by reportable business segment:
                                               Percent                    Percent                     Percent
                                   Fiscal       of net        Fiscal       of net         Fiscal       of net
 ($000s omitted)                    2006          sales        2005          sales         2004          sales
 Automotive                 $   466,160        20.8%        390,095        18.4%       357,196        19.1%
 Consumer                       111,596        22.6%         98,842        23.6%        92,588        26.0%
 Professional                   133,851        25.9%        127,475        26.2%       138,046        28.7%
 Other/Unallocated               43,722           ---        64,309           ---       46,297           ---
 Total                      $   755,329        23.3%        680,721        22.5%       634,127        23.4%

Automotive – R&D is the largest cost component of SG&A in the Automotive segment. These costs are
incurred to develop audio, electronic and infotainment systems for a growing number of automotive
customer platforms. Our infotainment systems have added considerable functionality over the past several
years and many are increasingly based on scaleable software. This enables us to service a full range of
vehicles in a cost efficient manner, from luxury to entry-level. In Europe, we develop systems for
Mercedes-Benz, BMW, Audi, Peugeot/Citroën, Porsche and others. We develop systems for Toyota,
Lexus, Hyundai, Chrysler, Harley-Davidson and others in the United States and Asia. R&D costs increased
in fiscal 2006 primarily due to higher spending on significant new infotainment system programs that will
begin production during fiscal 2007 and accelerate in fiscal years 2008 and 2009. Our Automotive R&D
costs for the fiscal years ended 2006, 2005 and 2004 were $232.2 million, $161.3 million and $167.5
million, respectively.

Consumer – The significant SG&A cost components for Consumer are R&D and selling expenses.
R&D costs for the fiscal years 2006, 2005 and 2004 were $36.3 million, $29.9 million and $18.9 million,
respectively. These year-to-year increases were primarily due to development of new multimedia products
such as JBL On Time, On Stage and On Tour, which are accessories for Apple’s iPod. We are also
developing personal navigation devices (“PND”) that will leverage many of our successful applications
developed in the Automotive segment. Selling expenses include salaries and benefits for the sales
personnel, marketing costs, trade show and product literature costs. Selling expenses were $32.1 million,
$30.7 million and $27.9 million in the fiscal years 2006, 2005 and 2004, respectively.


                                                      24
Professional – SG&A expense for Professional is primarily comprised of selling expenses and R&D costs.
Selling expenses are incurred to support a broad range of branded products. Professional products
are marketed to audio professionals for use in public places such as concert halls and stadiums.
These products are also used for recording, broadcasting and music reproduction systems. Selling
expenses were $49.3 million, $47.0 million and $47.7 million in the fiscal years 2006, 2005 and 2004,
respectively. We incur significant R&D costs to support new products. We have developed the HiQnet
networking protocol to enhance the functionality of our professional systems. This protocol allows an
audio professional to control a complete sound system from microphones through amplifiers to speakers
on one digital network. Professional R&D costs in the fiscal years 2006, 2005 and 2004 were $33.2 million,
$31.3 million and $30.3 million, respectively.

Other – Other SG&A expenses primarily include compensation, benefit and occupancy costs for corporate
employees. These expenses decreased in fiscal 2006 due primarily to certain unusual costs recorded in
fiscal 2005, including a $6 million expense on a swap contract related to the termination of an operating
lease and a $6 million expense for an unasserted claim.

Operating Income

Our fiscal 2006 operating income was $397.2 million, or 12.2 percent of net sales. This represents an
improvement of 0.6 percentage points above the prior year. Excluding restructuring charges of
$9.5 million, operating income was $406.7 million, or 12.5 percent of net sales. The improvement in
operating income was achieved as a result of strong performance in our Consumer and Professional
business segments, partially offset by lower Automotive operating margins. We expect fiscal 2007
operating income to increase by over 10 percent compared to fiscal 2006.

Operating income in fiscal 2005 was $351.0 million, or 11.6 percent of sales, representing a 2.2 percentage
point increase over fiscal 2004. The improvement in operating income was achieved by our development
of new infotainment systems for automotive customers, the turnaround in the Consumer business and the
elimination of lower margin Professional products.

We present below a summary of our operating income by reportable business segment:
                                         Percent                      Percent                       Percent
                              Fiscal      of net           Fiscal      Of net           Fiscal       of net
($000s omitted)                2006         sales           2005         sales           2004          sales
Automotive            $    337,746        15.1%          348,077       16.4%         308,923        16.5%
Consumer                     49,862       10.1%           26,715        6.4%          (13,029)      (3.7%)
Professional                 59,278       11.5%           45,498        9.3%            9,892        2.1%
Other                       (49,645)         ---         (69,309)         ---         (51,321)          ---
Total                 $    397,241        12.2%          350,981       11.6%         254,465         9.4%

Automotive – Automotive fiscal 2006 operating income was $337.7 million, or 15.1 percent of sales.
This represents a 1.3 percentage point decrease compared to last year. Our Automotive results include
$7.3 million of restructuring charges to increase efficiency at four manufacturing facilities and realign
our engineering organization. Automotive has also incurred substantial R&D costs due to required
development for new business awards from automotive customers. We are currently developing these
systems and the sales will not be generated until these programs begin production during fiscal year 2007
and continuing into fiscal 2008. We expect Automotive operating margins to approach 16 percent during
fiscal years 2007 and 2008.


                                                    25
Consumer – Consumer achieved operating income of $49.9 million in fiscal 2006, or 10.1 percent of sales.
This represents a 3.7 percentage point increase compared to last year. The growth is primarily due to
strong sales of our multimedia products during the year that have higher margins than other consumer
products.

Professional – Professional had operating income of $59.3 million in fiscal 2006, or 11.5 percent of sales.
This represents a 2.2 percentage point increase compared to last year. The increase is primarily due to
higher sales of branded products with the capability of integrating with our HiQnet protocol and
discontinuance of lower margin mixing console and AKG products.

Interest Expense, Net

Interest expense, net, was $13.0 million compared to $10.5 million last year. Our net interest expense
increased primarily due to higher weighted average interest rates. Our fiscal 2006 interest expense, net,
included $12.2 million of interest income primarily related to interest on our cash and cash equivalents
and short-term investment balances. In fiscal 2005 and 2004, interest income was $7.6 million and $3.5
million, respectively.

We had average borrowings of $342.0 million in fiscal 2006 compared to $340.3 million and $453.0
million in fiscal years 2005 and 2004, respectively. We used interest rate swaps during each of these years
to effectively convert fixed-rate debt to variable-rate debt. The weighted average borrowings exclude the
average fair value of the interest rate swaps of $2.5 million, $11.8 million and $22.8 million in fiscal years
2006, 2005 and 2004.

Our weighted average interest rate in fiscal 2006 was 7.4 percent. In fiscal 2005 and 2004, the weighted
average interest rates were 5.3 percent and 4.6 percent, respectively. Our fiscal 2006 weighted average
interest rates have increased because interest rates increased over the prior year and a majority of our
outstanding debt was based on floating rates after giving effect to interest rate swap contracts.

We expect fiscal 2007 interest expense, net, to be substantially lower than fiscal 2006 due to our fourth
quarter repurchase of $281.9 million of our outstanding senior notes. Our total debt at June 30, 2006
was $197.6 million compared to $333.9 million a year ago.

Miscellaneous Expenses

We recorded miscellaneous expenses, net, of $8.0 million compared to $5.1 million and $9.7 million in
fiscal years 2005 and 2004, respectively. The fiscal 2006 expense includes $4.9 million for repurchase
premiums associated with the fiscal 2006 repurchase of over 90 percent of our senior notes due in
February and July 2007, respectively, and a charge associated with the termination of interest rate swap
contracts. The fiscal 2005 expense includes $3.0 million for repurchase premiums, net of gain, on the
termination of interest rate swap contracts in connection with the repurchase of $49.9 million of our
outstanding public debt. Also included in fiscal 2005 were charitable contributions of $1.0 million for
Tsunami relief. Bank charges were $2.5 million, $2.7 million and $2.3 million in fiscal years 2006, 2005
and 2004, respectively.




                                                      26
Income Taxes

In fiscal 2006, our effective tax rate was 32.4 percent. Our effective tax rate for fiscal 2005 and 2004 was
30.6 percent. During the year ended June 30, 2006, we repatriated $500 million of cash from our foreign
subsidiaries under the American Jobs Creation Act of 2004. This decision resulted in $3.4 million of tax
charges during fiscal 2006. We also made cash tax payments of $135.7 million, primarily in Germany.
We currently expect the fiscal 2007 effective tax rate to be approximately 34 percent.

Financial Condition

Liquidity and Capital Resources

We primarily finance our working capital requirements through cash generated by operations, trade credit
and borrowings under our revolving credit facility. Cash and cash equivalents were $291.8 million at June
30, 2006 compared to $291.2 million at June 30, 2005. During fiscal 2006, cash was primarily used to
repurchase shares of our common stock and a significant portion of our outstanding senior notes, make
investments in our manufacturing facilities, make tax payments primarily in Germany, and meet the
working capital needs of our business segments.

During the fourth quarter of fiscal 2006, we borrowed under our revolving credit facility in Germany to
meet seasonal working capital needs. This was necessary due to our repatriation of $500 million from
subsidiaries in Germany to the U.S. under the American Jobs Creation Act of 2004. At June 30, 2006, the
balance of our revolving credit facility was $159.9 million. We expect to reduce this bank debt with cash
generated from our German businesses in fiscal 2007.

During fiscal 2005, cash was primarily used to purchase QNX Software Systems, repurchase shares of our
common stock, repurchase outstanding senior notes, purchase fixed assets held by the lessor under
operating leases and make tax payments in Germany.

We will continue to have cash requirements to support seasonal working capital needs, capital
expenditures, interest and principal payments, and dividend payments. We intend to use cash on
hand, cash generated by operations and borrowings under our revolving credit facility to meet these
requirements. We also intend to continue repurchasing shares of our common stock, evaluating buy
levels quarter to quarter, and reducing our debt. We believe that cash from operations and our borrowing
capacity will be adequate to meet our cash requirements over the next twelve months.

Below is a more detailed discussion of our cash flow activities during fiscal 2006.

Operating Activities

Our cash flows from operations were $399.9 million in fiscal 2006, compared to $419.7 million in the
prior year. The decrease was primarily due to tax benefits attributable to stock option exercises and other
changes to our deferred tax assets, partially offset by record net income for the year.

Working capital, excluding cash and short-term debt, was $106.7 million at June 30, 2006. This was a
significant decrease from $166.1 million at June 30, 2005. The June 30, 2006 and 2005 amounts represent
3.3 percent and 5.5 percent of net sales, respectively. The decrease is primarily due to improved accounts
receivable and accounts payable management offset by slightly higher inventory balances to support the
development of new infotainment systems for automotive customers.


                                                      27
Investing Activities

We had capital expenditures, net of acquisitions, of $130.5 million in fiscal 2006 compared to
$172.3 million in fiscal 2005 and $135.5 million in fiscal 2004. Fiscal 2006 capital expenditures included
the completion of a new manufacturing facility in Missouri and substantial investments in Europe for
customer tooling and other manufacturing equipment to support our infotainment system programs for
automotive customers. Capital expenditures were also made for new product tooling for consumer and
professional products. Fiscal 2005 capital expenditures included $28.4 million paid for fixed assets
purchased from operating leases. We also made investments in buildings, machinery and tooling,
especially in Europe, to support new infotainment systems for automotive customers. We anticipate
fiscal 2007 capital expenditures of approximately $150 million, primarily to make significant investments
in tooling and manufacturing equipment to support anticipated growth in our Automotive infotainment
systems business. Firm commitments of $20.2 million existed at June 30, 2006 for fiscal 2007 capital
expenditures.

We paid $13.8 million, net of cash acquired, in fiscal 2006 to purchase businesses to provide additional
engineering resources and invest in a joint venture in Korea. In fiscal 2005, we acquired QNX Software
Systems. The purchase price, net of cash acquired, was $139.2 million. QNX is a provider of real-time
operating system software, development tools, and services for embedded design systems. Since the
acquisition, QNX has been involved in developing our infotainment systems for automotive customers
by optimizing our software to fully integrate the operating system, basic framework and the applications.

Financing Activities

In fiscal 2006, we paid $192.6 million to repurchase 2.2 million shares of our common stock. Since the
inception of our share repurchase program in June 1998, we have acquired and placed in treasury
16.7 million shares at a cost of $510.8 million through June 30, 2006. Our Board of Directors has
authorized the repurchase of up to a total of 20 million shares. We presently intend to continue our share
repurchase program in fiscal 2007, evaluating the buy levels on a quarter-to-quarter basis.

Our total debt was $197.6 million at June 30, 2006, primarily comprised of $159.9 million of borrowings
under our revolving credit facility. Also included in total debt was $13.2 million principal amount of 7.125
percent senior notes due February 15, 2007 and $16.5 million principal amount of 7.32 percent senior
notes due July 1, 2007. We also had capital leases and other long-term borrowings of $6.2 million. Short-
term borrowings included in debt are $1.8 million.

At June 30, 2005, our total debt was $333.9 million primarily comprised of $171.2 million principal
amount of 7.125 percent senior notes due February 15, 2007 and $140.0 million principal amount of
7.32 percent senior notes due July 1, 2007. We also had capital leases, the carrying value of interest rate
hedges and other long-term borrowings of $20.1 million. We had short-term borrowings of $2.6 million.

During the past two fiscal years, we used cash from operations to repurchase a substantial amount of our
outstanding senior notes. In fiscal 2006, we purchased and retired $158.4 million of our 7.125 percent
senior notes, reducing the outstanding principal amount from $171.2 million to $13.2 million. The senior
notes were repurchased at an average premium of 0.895 percent, resulting in a non-operating charge of
$1.6 million. We also terminated $170.0 million in interest rate swaps that hedged the 7.125 percent senior
notes, resulting in a non-operating charge of $0.3 million. We also purchased and retired $123.5 million of
our 7.32 percent senior notes, reducing the outstanding principal amount from $140.0 million to


                                                     28
$16.5 million. The senior notes were repurchased at an average premium of 1.628 percent, resulting in a
non-operating charge of $2.3 million. We also terminated $140.0 million in interest rate swaps that
hedged the 7.32 percent senior notes, resulting in a non-operating charge of $0.8 million. In June 2006,
we announced the redemption of the remaining $13.2 million principal amount of our 7.125 percent
senior notes. The redemption was completed in July 2006. At June 30, 2006, we had authorization to
repurchase all of our remaining outstanding senior notes.

During fiscal 2005, we purchased and retired $49.9 million of our 7.125 percent senior notes, reducing the
outstanding principal amount from $220.6 million to $171.2 million. The senior notes were repurchased
at an average premium of 9.18 percent, resulting in a non-operating charge of $4.6 million. We also
terminated $30.0 million in interest rate swaps that hedged the 7.125 percent senior notes, resulting in a
non-operating gain of $1.6 million.

On June 28, 2005, we entered into a $300 million multi-currency revolving credit facility with a group of
banks. This facility expires in June 2010 and replaced the $150 million revolving credit facility that expired
on August 14, 2005. On June 22, 2006, we amended and restated our multi-currency revolving credit
facility. The restated credit agreement, among other things, added Harman Holding GmbH & Co. KG
(“Harman Holding”), a German limited partnership and a wholly owned subsidiary of the Company, as
an additional borrower. The maximum principal amount of borrowings permitted under the restated
credit agreement remains at $300 million. The restated credit agreement also permits the maximum
aggregate revolving commitment amount to be increased to $550 million under certain circumstances.
At June 30, 2006, we had $159.9 million borrowings under the $300 million revolving credit facility and
outstanding letters of credit of $6.7 million. Unused availability under the revolving credit facility was
$133.4 million at June 30, 2006.

Our long-term debt agreements contain financial and other covenants that, among other things, limit our
ability to incur additional indebtedness, restrict subsidiary dividends and distributions, limit our ability to
encumber certain assets and restrict our ability to issue capital stock of our subsidiaries. Our long-term
debt agreements permit us to pay dividends or repurchase our capital stock without any dollar limitation
provided that we would be in compliance with the financial covenants in our revolving credit facility after
giving effect to such dividend or repurchase. We were in compliance with the terms of our long-term debt
agreements at June 30, 2006, 2005 and 2004.

Equity

Our shareholders’ equity was $1.228 billion at June 30, 2006, an increase of $167.2 million compared to
the prior year. The increase was primarily due to net income of $255.3 million offset by stock repurchases
of $192.6 million.

At June 30, 2005, we had total shareholders’ equity of $1.061 billion, an increase of $186.0 million
compared to the prior year. The increase was primarily due to net income of $232.8 million and the tax
benefit attributable to stock options of $74.1 million, partially offset by $146.4 million used to repurchase
shares of our common stock during fiscal 2005.




                                                      29
Contractual Obligations

We have obligations and commitments to make future payments under debt agreements and operating
leases. The following table details our financing obligations by due date:
                                                      Fiscal Years Ending June 30,
 ($000s)                                   2007       2008          2009         2010      2011     Thereafter      Total
 Short-term borrowings (a)             $ 1,751           ---          ---         ---         ---          ---      1,751
 Senior notes (b)                       13,168       16,486           ---         ---         ---          ---     29,654
 Capital leases (c)                        427          434          450         468         386          390       2,555
 Other long-term obligations (b)         2,742           86           90     159,995         100          581     163,594
 Firm commitments for capital
 expenditures                            20,216          ---          ---          ---        ---          ---     20,216
 Purchase obligations (d)               123,847          57           12           ---       859           ---    124,775
 Non-cancelable operating leases (c)     39,966      38,677       31,320       24,955     17,755       14,253     166,926
 Total contractual cash obligations    $202,117      55,740       31,872      185,418     19,100       15,224     509,471

 (a) As described in Note 5 to our Consolidated Financial statements.
 (b) As described in Note 6 to our Consolidated Financial statements.
 (c) As described in Note 7 to our Consolidated Financial statements.
 (d) Includes amounts committed under legally enforceable agreements for purchase of goods and services with defined terms
     as to quantity, price and timing of delivery.

Business Outlook

We achieved record results in fiscal 2006 and look forward to the opportunities that lie ahead. During the
past fiscal year, we introduced an infotainment system for the redesigned Mercedes-Benz S-Class luxury
vehicle. The launch of the new S-Class was an overwhelming success. We have incurred substantial R&D
costs to develop the next generation of infotainment systems for an expanding array of automotive
platforms and to develop new consumer and professional products. Automotive has received significant
contract awards, including a recent award for the refresh on the Mercedes-Benz 2009 S-Class, and will
begin producing new audio and infotainment systems for Chrysler, Hyundai, Peugeot/Citroën and BMW
beginning in fiscal 2007. These programs will then accelerate production in fiscal years 2008 and 2009.
Consumer will continue to develop new products that emphasize mobility such as personal navigation
devices and will introduce new multimedia products that are accessories for portable music players such
as the Apple iPod. We believe music-enabled cell phones will provide us a substantial market to offer
these accessories in future periods. We expect Professional to develop more products that are HiQnet
enabled thus expanding the capabilities of this digital network protocol.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are required to include information about potential effects of changes in interest rates and currency
exchange rates in our periodic reports filed with the Securities and Exchange Commission.

Interest Rate Sensitivity/Risk

At June 30, 2006, interest on approximately 15 percent of our borrowings was determined on a fixed rate
basis. The interest rates on the balance of our debt are subject to changes in U.S. and European short-term
interest rates. To assess exposure to interest rate changes, we have performed a sensitivity analysis
assuming a hypothetical 100 basis point increase or decrease in interest rates across all outstanding debt
and investments. Our analysis indicates that the effect on fiscal 2006 net income of such an increase and
decrease in interest rates would be approximately $0.9 million. Based on June 30, 2005 positions, the
impact of such changes in interest rates was approximately $0.2 million to fiscal 2005 net income.

                                                       30
The following table provides information as of June 30, 2006 about our financial instruments that are
sensitive to changes in interest rates and debt obligations. The table presents principal cash flows and
related average interest rates by contractual maturity dates. Weighted average variable rates are generally
based on LIBOR as of the reset dates. Unless otherwise indicated, the information is presented in U.S.
dollar equivalents as of June 30, 2006.

Principal Payments and Interest Rates by Contractual Maturity Dates
                                                                                                     Fair
                                                                                                   value
                                   Fiscal Years Ending June 30,                                 (assets)/
 ($millions)                2007      2008      2009     2010     2011   Thereafter   Total    liabilities
 Debt obligation
 (US$)                     $17.7     16.5       0.1     160.0      0.1         0.6    195.0      195.3
 Average interest rate    6.61% 7.31% 5.00% 3.48% 5.00%                     5.00%        ---          ---

Foreign Currency Risk

We maintain significant operations in Germany, the United Kingdom, France, Austria, Hungary,
Mexico, Switzerland and Sweden. As a result, we are subject to market risks arising from changes in
foreign currency exchange rates, principally the change in the value of the Euro compared to the U.S.
dollar. Our subsidiaries purchase products and raw materials in various currencies. As a result, we may
be exposed to cost changes relative to local currencies in the markets to which we sell our products. To
mitigate these transactional risks, we enter into forward foreign exchange contracts. Also, foreign currency
positions are partially offsetting and are netted against one another to reduce exposure.

We presently estimate the effect on projected 2007 income before income taxes, based upon a recent
estimate of foreign exchange transactional exposure, of a uniform strengthening or uniform weakening of
the transaction currency rates of 10 percent would be to increase or decrease income before income taxes
by approximately $21 million. As of June 30, 2006, we had hedged a portion of our estimated foreign
currency transactions using forward exchange contracts.

We presently estimate the effect on projected 2007 income before income taxes, based upon a recent
estimate of foreign exchange translation exposure (translating the operating performance of our foreign
subsidiaries into U.S. dollars), of a uniform strengthening or weakening of the U.S. dollar by 10 percent
would be to increase or decrease income before income taxes by approximately $34 million.

Competitive conditions in the markets in which we operate may limit our ability to increase prices in the
event of adverse changes in currency exchange rates. For example, certain products made in the U.S. are
sold outside of the U.S. Sales of these products are affected by the value of the U.S. dollar relative to other
currencies. Any long-term strengthening of the U.S. dollar could depress the demand for these U.S.
manufactured products and reduce sales. However, due to the multiple currencies involved in our
business and the netting effect of various simultaneous transactions, our foreign currency positions are
partially offsetting.

Actual gains and losses in the future may differ materially from the hypothetical gains and losses discussed
above based on changes in the timing and amount of interest rate and foreign currency exchange rate
movements and our actual exposure and hedging transactions.



                                                        31
Item 8. Consolidated Financial Statements and Supplementary Data

Management’s Report on Internal Control over Financial Reporting

The management of Harman International is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control system was designed to provide reasonable
assurance to our management and Board of Directors regarding the preparation and the fair presentation
of published financial statements. All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.

We assessed the effectiveness of our internal control over financial reporting as of June 30, 2006.
In making this assessment, we used the framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework.”
Our assessment included an evaluation of such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies, overall control environment
and information systems control environment. Based on our assessment, we have concluded that, as of
June 30, 2006, our internal control over financial reporting was effective.

Our assessment of the effectiveness of our internal control over financial reporting, as of June 30, 2006,
has been audited by KPMG LLP, an independent registered public accounting firm. KPMG’s report on
our internal controls over financial reporting is included herein.




/s/ Bernard A. Girod
Bernard A. Girod
Vice Chairman and Chief Executive Officer



/s/ Kevin L. Brown
Kevin L. Brown
Executive Vice President and Chief Financial Officer




                                                     32
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The Board of Directors and Shareholders
Harman International Industries, Incorporated:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal
Control over Financial Reporting appearing under Item 8, that Harman International Industries, Incorporated
maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The management of Harman International Industries, Incorporated is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

In our opinion, management’s assessment that Harman International Industries, Incorporated maintained effective
internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, Harman International Industries, Incorporated maintained,
in all material respects, effective internal control over financial reporting as of June 30, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June
30, 2006 and 2005, and the related consolidated statements of operations, cash flows and shareholders’ equity and
comprehensive income for each of the years in the three-year period ended June 30, 2006 and our report dated
September 6, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
Los Angeles, California
September 6, 2006




                                                            33
Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Harman International Industries, Incorporated:

We have audited the accompanying consolidated balance sheets of Harman International Industries,
Incorporated and subsidiaries as of June 30, 2006 and 2005, and the related consolidated statements of
operations, cash flows and shareholders’ equity and comprehensive income for each of the years in the
three-year period ended June 30, 2006. In connection with our audits of the consolidated financial
statements, we also have audited the related financial statement schedule for each of the years in the three-
year period ended June 30, 2006. These consolidated financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Harman International Industries, Incorporated and subsidiaries as of
June 30, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2006, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Harman International Industries, Incorporated’s internal
control over financial reporting as of June 30, 2006, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated September 6, 2006 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP
Los Angeles, California
September 6, 2006




                                                      34
Consolidated Balance Sheets
Harman International Industries, Incorporated and Subsidiaries
($000s omitted except share amounts)

                                                                                     June 30,
                                                                                 2006              2005
Assets
Current assets
   Cash and cash equivalents                                             $    291,758           291,214
   Receivables (less allowance for doubtful accounts of $8,738 in 2006
     and $8,975 in 2005)                                                      444,474           433,041
   Inventories (note 2)                                                       344,957           312,950
   Other current assets                                                       168,168           146,088
Total current assets                                                         1,249,357      1,183,293
Property, plant and equipment, net (notes 3, 6 and 7)                         521,935           491,619
Goodwill (note 4)                                                             381,219           345,071
Other assets                                                                  202,150           167,220
Total assets                                                             $ 2,354,661        2,187,203

Liabilities and Shareholders’ Equity
Current liabilities
   Short-term borrowings (notes 5)                                       $      1,751             2,593
   Current portion of long-term debt (note 6)                                  16,337               533
   Accounts payable                                                           320,327           274,145
   Accrued liabilities                                                        414,093           345,941
   Income taxes payable (note 10)                                             116,493           105,858
Total current liabilities                                                     869,001           729,070
Borrowings under revolving credit facility (note 6)                           159,900                ---
Senior notes (note 6)                                                          19,566           330,791
Minority interest (note 17)                                                     2,716                ---
Other non-current liabilities                                                  75,314            66,394
Shareholders’ equity (note 11)
  Preferred stock, $.01 par value. Authorized 5,000,000 shares;
   none issued and outstanding                                                      ---              ---
  Common stock, $.01 par value. Authorized 200,000,000 shares;
   issued 82,754,909 shares in 2006 and 81,122,026 in 2005                        827               811
  Additional paid-in capital                                                  544,871           455,158
  Accumulated other comprehensive income (loss):
    Unrealized gain (loss) on hedging derivatives                               (3,267 )          5,548
    Minimum pension liability adjustment                                       (11,789 )        (14,147)
    Cumulative foreign currency translation adjustment                          64,280           39,702
  Retained earnings                                                          1,144,070          892,096
  Less common stock held in treasury (16,690,182 shares in 2006
   and 14,459,482 shares in 2005)                                            (510,828 )         (318,220)
Total shareholders’ equity                                                   1,228,164      1,060,948

Commitments and contingencies (notes 7, 8 and 14)

Total liabilities and shareholders’ equity                               $ 2,354,661        2,187,203

See accompanying notes to consolidated financial statements.


                                                       35
Consolidated Statements of Operations
Harman International Industries, Incorporated and Subsidiaries
($000s omitted except per share amounts)


                                                                          Years Ended June 30,
                                                                     2006           2005             2004

Net sales                                                      $ 3,247,897      3,030,889        2,711,374
Cost of sales                                                    2,095,327      1,999,187        1,822,782
Gross profit                                                     1,152,570      1,031,702          888,592

Selling, general and administrative expenses                       755,329       680,721          634,127
Operating income                                                   397,241       350,981          254,465

Other expenses:
 Interest expense, net                                              13,027         10,516          17,207
 Miscellaneous, net                                                  8,027          5,128           9,738

Income before income taxes and minority interest                   376,187       335,337          227,520

Income tax expense, net                                            121,877       102,489           69,637
Minority interest                                                     (985)           ---              ---

Net income                                                     $   255,295       232,848          157,883

Basic earnings per share                                       $      3.85           3.47             2.40

Diluted earnings per share                                     $      3.75           3.31             2.27



Weighted average shares outstanding – basic                         66,260         67,120          65,779

Weighted average shares outstanding – diluted                       68,105         70,399          69,487




See accompanying notes to consolidated financial statements.




                                                       36
Consolidated Statements of Cash Flows
Harman International Industries, Incorporated and Subsidiaries
($000s omitted)                                                         Years Ended June 30,
                                                                     2006        2005              2004
Cash flows from operating activities:
 Net income                                                    $ 255,295      232,848          157,883
Adjustments to reconcile net income to net cash provided by
  operating activities:
 Depreciation and amortization                                     129,949    118,665          106,032
 Deferred income taxes                                              (8,011)   (83,057 )        (17,119)
 Loss on disposition of assets                                       1,480      3,381           13,358
 Stock option expense                                               16,586     14,318           10,942
 Excess tax benefit attributable to stock options                  (45,493)    74,107            9,819
Changes in working capital, net of acquisition/disposition
 effects:
 Decrease (increase) in:
   Receivables                                                       4,877      (3,015 )        (44,459)
   Inventories                                                     (21,433)    (25,291 )         65,679
   Other current assets                                            (23,446)     (7,370 )          5,294
 Increase (decrease) in:
   Accounts payable                                               37,274       35,396           56,761
   Accrued liabilities                                            41,762       62,555           33,182
   Income taxes payable                                            5,303      (19,075 )         66,429
   Other operating activities                                      5,731       16,282           18,650
Net cash provided by operating activities                      $ 399,874      419,744          482,451
Cash flows from investing activities:
 Payment for purchase of companies, net of cash acquired       $  (13,808)    (145,680 )        (34,281)
 Proceeds from asset dispositions                                   1,574        2,128            9,048
 Capital expenditures                                            (130,548)    (172,326 )       (135,493 )
 (Purchase) sale of investments                                        ---      91,000          (52,450)
 Other items, net                                                  (3,793)       4,485            1,354
Net cash used in investing activities                          $ (146,575)    (220,393 )       (211,822)
Cash flows from financing activities:
  Decrease in short-term borrowings                         $     (828)         (1,699 )           (750)
  Borrowings under revolving credit facility                   158,294              ---              ---
  Repayment of long-term debt                                 (281,945)        (49,921 )        (88,480)
  Other decrease in long-term debt                             (13,250)         (1,077 )        (15,587)
  Repurchase of common stock                                  (192,608)       (146,369 )             ---
  Dividends paid to shareholders                                (3,321)         (3,354 )         (3,289)
  Exercise of stock options                                     27,650          11,278           10,358
  Excess tax benefits from share-based payment arrangements     45,493              ---              ---
  Other                                                            462              ---              ---
Net cash used in financing activities                       $ (260,053)       (191,142 )        (97,748)
Effect of exchange rate changes on cash                          7,298          (3,703 )          4,466
Net increase in cash and cash equivalents                            544        4,506          177,347
Cash and cash equivalents at beginning of period               $ 291,214      286,708          109,361
Cash and cash equivalents at end of period                     $ 291,758      291,214          286,708
Supplemental schedule of non-cash investing activities:
  Fair value of assets acquired                                $    12,102    155,939            35,678
  Cash paid for the assets                                           6,503    139,213            27,545
  Liabilities assumed                                          $     5,599     16,726             8,133

See accompanying notes to consolidated financial statements.


                                                       37
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2006, 2005 and 2004
                                       Common Stock
                                                                           Accumulated                               Total
                                                   $0.01    Additional           other                              share-
                                 Number of           Par      paid-in    comprehensive    Retained    Treasury     holders’
($000s omitted)                     shares         value       capital    income (loss)   earnings       stock      equity

Balance, June 30, 2003           32,609,633        $ 390      324,757           (5,519)    508,008    (171,851)    655,785

Comprehensive income:
Net income                               —            —            —                —      157,883          —      157,883
Foreign currency
translation adjustment                   —            —            —            31,631          —           —       31,631
Unrealized gain on
hedging derivatives                      —            —            —              2,784         —           —        2,784
Minimum pension liability                —            —            —             (917)          —           —        (917)

Total comprehensive income               —            —            —            33,498     157,883          —      191,381
Stock issue: two-for-one split   32,609,633           390       (390)               —           —           —           —
Exercise of stock options,
net of shares received              870,756            9       10,349               —           —           —       10,358
Tax benefit attributable to
stock options                            —            —         9,819               —           —           —        9,819
Stock option compensation                —            —        10,942               —           —           —       10,942
Dividends ($.05 per share)               —            —            —                —       (3,289)         —       (3,289)

Balance, June 30, 2004           66,090,022    $   $ 789      355,477           27,979     662,602    (171,851)    874,996

Comprehensive income:
Net income                               —            —            —                —      232,848          —      232,848
Foreign currency
translation adjustment                   —            —            —            (3,477)         —           —       (3,477)
Unrealized gain on
hedging derivatives                      —            —            —            13,369          —           —       13,369
Minimum pension liability                —            —            —            (6,768)         —           —       (6,768)

Total comprehensive income               —            —            —              3,124    232,848          —      235,972
Exercise of stock options,
net of shares received            2,250,422           22       11,256               —           —           —       11,278
Tax benefit attributable to
stock option plan                        —            —        74,107               —           —           —       74,107
Stock option compensation                —            —        14,318               —           —           —       14,318
Treasury shares purchased        (1,677,900)          —            —                —           —     (146,369)   (146,369)
Dividends ($.05 per share)               —            —            —                —       (3,354)         —       (3,354)

Balance, June 30, 2005           66,662,544        $ 811      455,158           31,103     892,096    (318,220)   1,060,948

Comprehensive income:
Net income                               —            —            —                —      255,295          —      255,295
Foreign currency
translation adjustment                   —            —            —            24,578          —           —       24,578
Unrealized gain on
hedging derivatives                      —            —            —            (8,815)         —           —       (8,815)
Minimum pension liability                —            —            —              2,358         —           —        2,358

Total comprehensive income               —            —            —            18,121     255,295          —      273,416
Exercise of stock options,
net of shares received            1,632,883           16       27,634               —           —           —       27,650
Tax benefit attributable to
stock option plan                        —            —        45,493               —           —           —       45,493
Stock option compensation                —            —        16,586               —           —           —       16,586
Treasury shares purchased        (2,230,700)          —            —                —           —     (192,608)   (192,608)
Dividends ($.05 per share)               —            —            —                —       (3,321)         —       (3,321)

Balance, June 30, 2006           66,064,727        $ 827      544,871           49,224    1,144,070   (510,828)   1,228,164


See accompanying notes to consolidated financial statements.




                                                                 38
Notes to Consolidated Financial Statements
Harman International Industries, Incorporated and Subsidiaries
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of Harman
International and our subsidiaries after the elimination of significant intercompany transactions and
accounts.

Reclassifications. Where necessary, prior years’ information has been reclassified to conform to the fiscal
2006 financial statement presentation.

Use of Estimates. The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying
notes. Actual results may differ from those estimates, and the differences may be material to the
consolidated financial statements.

Among the most significant estimates used in the preparation of our financial statements are estimates
associated with the valuation of inventory, depreciable lives of fixed assets, accounting for business
combinations, the evaluation of the recoverability of goodwill, evaluation of the recoverability of pre-
production and development contract costs, warranty liability, litigation and taxation. In addition,
estimates form the basis for our reserves for sales discounts, sales allowances, accounts receivable,
inventory, and postretirement and other employee benefits. Various assumptions go into the
determination of these estimates. The process of determining significant estimates requires consideration
of factors such as historical experience, current and expected economic conditions, and actuarial methods.
We re-evaluate these significant factors and makes changes and adjustments where facts and
circumstances indicate that changes are necessary.

Revenue Recognition. Revenue is generally recognized at the time of product shipment or delivery,
depending on when the passage of title to goods transfers to unaffiliated customers, when all of the
following have occurred: a firm sales agreement is in place, pricing is fixed or determinable and collection
is reasonably assured. Sales are reported net of estimated returns, discounts, rebates and incentives.
Substantially all of our revenue transactions involve the delivery of a physical product.

Sales Discounts. We offer product discounts and sales incentives including prompt payment discounts,
volume incentive programs, rebates and dealer order incentives. We report revenues net of discounts and
other sales incentives in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s
Products).

Cost of Sales. Cost of sales includes material, labor and overhead for products manufactured by us and
cost of goods produced for us on a contract basis. Expenses incurred for manufacturing depreciation and
engineering, warehousing, shipping and handling, sales commissions, warranty and customer service are
also included in cost of sales.

Allowance for Doubtful Accounts. We reserve an estimated amount for accounts receivable that may not
be collected. Methodologies for estimating allowance for doubtful accounts are primarily based on specific
identification of uncollectible accounts. Historical collection rates and customer credit worthiness are
considered in determining specific reserves. At June 30, 2006 and 2005, we had $8.7 million and
                                                      39
$9.0 million, respectively, reserved for possible uncollectible accounts receivable. As with many estimates,
management must make judgments about potential actions by third parties in establishing and evaluating
our allowance for doubtful accounts.

Warranty Liabilities. We warrant our products to be free from defects in materials and workmanship
for a period ranging from one to five years from the date of purchase, depending on the product.
The warranty is a limited warranty, and it may impose certain shipping costs on the customer and
excludes deficiencies in appearance except for those evident when the product is delivered. Our dealers
and warranty service providers normally perform warranty service for loudspeakers and electronics in the
field, using parts supplied on an exchange basis by our company. Estimated warranty liabilities are based
upon past experience with similar types of products, the technological complexity of certain products,
replacement cost and other factors. See Note 9, Warranty Liabilities, for additional information regarding
our warranties.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include non-
manufacturing salaries and benefits, stock option expense, occupancy costs, professional fees, research and
development costs, amortization of intangibles, advertising and marketing costs and other operating
expenses.

Advertising Costs. We expense advertising costs as incurred. When production costs are incurred for
future advertising, these costs are recorded as an asset and subsequently expensed when the advertisement
is first put into service.

Amortization of Intangibles. Amortization of intangibles primarily includes amortization of intangible
assets such as patents, trademarks and distribution agreements and amortization of costs, other than
interest costs. Intangibles are amortized over 10 months to 17 years. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill was not amortized after July 1, 2002.

Research and Development. Research and development costs are expensed as incurred. Our expenditures
for research and development were $302.0 million, $222.6 million and $216.9 million for the fiscal years
ending June 30, 2006, 2005 and 2004, respectively.

Interest Expense, Net. Interest expense, net, includes interest expense and amortization of original issue
discount on debt securities, net of interest income.

Cash and Cash Equivalents. Cash and cash equivalents includes cash on hand and short-term investments
with original maturities of less than three months.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined principally by the
first-in, first-out method. The valuation of inventory requires us to make judgments and estimates
regarding obsolete, damaged or excess inventory as well as current and future demand for our products.
The estimates of future demand along with analysis of usage data that we use in the valuation of inventory
are the basis for our inventory reserves and have an effect on our results of operations. See Note 2,
Inventories, for additional information.

Property, Plant and Equipment. Property, plant and equipment is stated at cost or, in the case of
capitalized leases, at the present value of the future minimum lease payments. Depreciation and
amortization of property, plant and equipment is computed primarily using the straight-line method over
useful lives estimated from 3 to 30 years or over the term of the lease, whichever is shorter. Buildings and
improvements are depreciated over 3 to 30 years, machinery and equipment are depreciated over 5 to 10
                                                     40
years and furniture and fixtures are depreciated over 3 years. See Note 3, Property, Plant and Equipment,
for additional information.

Goodwill. Effective July 1, 2002, we adopted SFAS No.142, Goodwill and Other Intangible Assets.
Under SFAS No.142, goodwill and other intangible assets deemed to have indefinite lives are no longer
amortized, but are subject to an annual impairment test. The goodwill balance at June 30, 2006 was
$381.2 million. During our annual impairment test in fiscal 2006, we determined that goodwill was not
impaired based on a valuation of our reporting units at the April 30, 2006 test date. The valuation took
into consideration various factors such as our historical performance, future discounted cash flows,
performance of our competitors and overall market conditions.

We cannot predict the occurrence of certain events that might adversely affect the reported value of
goodwill. Such events may include, but are not limited to, strategic decisions made in response to
economic and competitive conditions, the impact of the economic environment on our customer base,
or a material adverse change in our relationship with one or more significant customers. See Note 4,
Goodwill, for additional information.

Pre-Production and Development Costs. We incur pre-production and development costs primarily
related to infotainment systems that we develop for automobile manufacturers pursuant to long-term
supply agreements. We record certain costs incurred pursuant to these agreements as unbilled costs in
accordance with EITF Issue No. 99-5, Accounting for Pre-Production Costs Related to Long-Term Supply
Agreements, or the percentage-of-completion method of AICPA Statement of Position (“SOP”) 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Unbilled costs at
June 30, 2006 were $34.4 million, including $4.2 million of pre-production costs and $30.2 million of
costs under development contracts. Unbilled costs reimbursable in the next twelve months total $11.5
million and are recorded in Other current assets. Unbilled costs reimbursable in subsequent years total
$22.9 million and are recorded in Other assets. At June 30, 2006, we had fixed assets of $17.8 million for
molds, dies and other tools which our customers will eventually purchase and own pursuant to long-term
supply contracts.

At June 30, 2005, total unbilled costs were $35.8 million, including $5.2 million of pre-production costs
and $30.6 million of costs under development contracts. At June 30, 2005, unbilled costs reimbursable in
the next twelve months totaled $11.9 million and were recorded in Other current assets. Unbilled costs
reimbursable in subsequent years totaled $23.9 million and were recorded in Other assets.

Purchased and Deferred Software Costs. Software costs that are related to conceptual formulation and
incurred prior to the establishment of technological feasibility are expensed as incurred. Costs incurred to
purchase software to be sold as an integral component of a product are deferred until the product is sold.
Software development costs incurred subsequent to establishment of technological feasibility and which
are considered recoverable by management are deferred in compliance with SFAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, and amortized over the product’s
life, usually three years. At June 30, 2006, deferred costs were $0.4 million, net of accumulated
amortization of $35.2 million. At June 30, 2005, deferred costs were $1.4 million, net of accumulated
amortization of $34.2 million. Deferred costs, net, are included in Other assets on the balance sheet.
Historically, deferred costs were comprised of costs to acquire or develop automotive infotainment system
software.

Income Taxes. Deferred income tax assets or liabilities are computed based on the temporary differences
between the financial statement and income tax basis of assets and liabilities using the statutory marginal
                                                     41
income tax rate in effect for the years in which the differences are expected to reverse. The deferred
income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected
reversal of the cumulative temporary differences between the carrying value of assets and liabilities for
financial statement and income tax purposes. Deferred income tax expense is measured by the change in
the net deferred income tax asset or liability during the year. We have not made provision for U.S. Federal
or foreign withholding taxes on foreign subsidiary undistributed earnings as of June 30, 2006, because
such earnings are intended to be permanently invested, with the exception of $500 million in earnings that
were repatriated in fiscal 2006 under the American Jobs Creation Act of 2004. It is not practicable to
determine the U.S. Federal income tax liability, if any, which would be payable if such earnings were not
reinvested indefinitely. Additional information regarding income taxes appears in Note 10, Income Taxes.

Pension and Other Postretirement benefits. We provide postretirement benefits to certain employees.
Employees in the United States are covered by a defined contribution plan. Our contributions to this plan
are based on a percentage of employee contributions and, with approval of the Board of Directors, profit
sharing contributions may be made as a percentage of employee compensation. These plans are funded on
a current basis.

Certain employees outside the United States are covered by non-contributory defined benefit plans.
The defined benefit plans are funded in conformity with the funding requirements of applicable
government regulations. Generally, benefits are based on age, years of service, and the level of
compensation during the final years of service.

We also have an unfunded Supplemental Executive Retirement Plan (SERP) that provides retirement,
death and termination benefits, as defined, to certain key executives designated by the Board of Directors.
Pension and Other Postretirement benefits are discussed further in Note 12, Pension and Other
Postretirement Benefits.

Foreign Currency Translation. The financial statements of subsidiaries located outside of the United
States generally are measured using the local currency as the functional currency. Assets, including
goodwill, and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet
date. The resulting translation adjustments are included in accumulated other comprehensive income
(loss). Income and expense items are translated at average monthly exchange rates. Gains and losses from
foreign currency transactions of these subsidiaries are included in net income.

Derivative Financial Instruments. We are exposed to market risks arising from changes in interest rates,
commodity prices and foreign currency exchange rates. We use derivatives in our management of interest
rate and foreign currency exposure. We do not utilize derivatives that contain leverage features. On the
date that we enter into a derivative that qualifies for hedge accounting the derivative is designated as a
hedge of the identified exposure. We document all relationships between hedging instruments and hedged
items and assess the effectiveness of our hedges at inception and on an ongoing basis.

For each derivative instrument that is designated and qualifies as a fair value hedge, the gain or loss on the
derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in current earnings during the period of the change in fair values. For each derivative
instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive income and reclassified into
earnings in the period during which the hedged transaction affects earnings. For derivatives that are
designated and qualify as hedges of net investments in subsidiaries located outside the United States, the
gain or loss is reported in other comprehensive income as a part of the cumulative translation adjustment
                                                      42
if the derivative is effective. For derivative instruments not designated as hedging instruments, the gain or
loss is recognized in current earnings during the period of change. For additional information regarding
derivatives, see Note 15, Derivatives.

Interest Rate Management. During the current fiscal year, we had in place interest rate swaps, which were
designated as fair value hedges of the underlying fixed rate obligations. The fair value of the interest rate
swaps were recorded in other assets or other long-term liabilities with a corresponding increase or
decrease in the fixed rate obligations. The changes in the fair value of the interest rate swaps and the
underlying fixed rate obligations were recorded as equal and offsetting unrealized gains and losses in
interest expense. As of June 30, 2006 all interest rates swaps were terminated in connection with the
repurchase of the majority of our senior debt. For additional information, see Note 6, Long-Term Debt
and Current Portion of Long-Term Debt.

Foreign Currency Management. The fair value of foreign currency related derivatives is included in the
Consolidated Balance Sheet in other current assets and accrued liabilities. The earnings impact of cash
flow hedges relating to forecasted purchases of inventory is generally reported in cost of sales to match the
underlying transaction being hedged. Unrealized gains and losses on these instruments are deferred in
other comprehensive income until the underlying transaction is recognized in earnings. The earnings
impact of cash flow hedges relating to the variability in cash flows associated with foreign currency
denominated assets and liabilities is reported in cost of sales or other expense depending on the nature of
the assets or liabilities being hedged. The amounts deferred in other comprehensive income associated
with these instruments generally relate to foreign currency spot-rate to forward-rate differentials that are
recognized in earnings when the hedged transaction takes place.

Stock-Based Compensation. Effective July 1, 2005, we adopted SFAS No. 123R, Accounting for Stock-Based
Compensation, using the modified prospective method. Under SFAS No. 123R, our compensation expense
is recognized based on the estimated fair value of stock options and similar equity instruments awarded to
employees. Prior to fiscal 2006, we accounted for stock-based compensation according to the fair-value
method of stock-based compensation per SFAS No. 123, Accounting for Stock-Based Compensation, for all
grants made on or after July 1, 2002. As such, an expense based on service attribution recognized in
accordance with Financial Accounting Standards Interpretation (“FIN”) No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans, and the fair value of stock options
granted in fiscal 2005, 2004 and 2003 have been reflected in net income. Stock-based compensation is
discussed further in Note 11, Stock Option and Incentive Plan.

Recent Accounting Pronouncements.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, Accounting for
Uncertainty in Income Taxes. FIN 48 is an interpretation of SFAS No. 109, Accounting for Income Taxes,
and prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the future impact, if any, of the adoption of FIN 48 on our financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154
replaces Accounting Principles Board (“APB”) Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires retrospective
application to prior period financial statements of changes in accounting principle, unless it is
                                                     43
impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS
No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We do not expect SFAS No. 154 to have a material impact on our consolidated
financial statements upon adoption in fiscal 2007.

In April 2005, the FASB issued EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income Statement. EITF No. 06-3 discusses how to
present various types of taxes in the income statement (Gross versus Net Presentation). EITF No. 06-3 is
effective for reporting periods beginning after December 15, 2006. We are currently evaluating the
reporting impact of the adoption of EITF No. 06-3 and do not expect it to have a material impact on our
financial statements upon adoption in fiscal 2007.

In December 2004, the FASB issued FASB Staff Position (“FSP”) No. FAS 109-2, Accounting and Disclosure
Guidance for Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The
American Jobs Creation Act of 2004 (the Act) introduces a special one-time dividends received deduction
on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. FSP
FAS No. 109-2 allows an entity to evaluate the effect of the Act on its plans to reinvest or repatriate foreign
earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes, and provides accounting
and disclosure guidance for the repatriation provision. During the fiscal year ended June 30, 2006,
management approved a plan to repatriate $500 million of cash from our foreign subsidiaries resulting in
a $3.4 million tax charge. The $500 million of cash was repatriated during fiscal 2006. See Note 10, Income
Taxes.

Note 2 - Inventories
Inventories consist of the following:
                                                                                       June 30,
 ($000s omitted)                                                                    2006                2005
 Finished goods                                                             $    147,663            132,426
 Work in process                                                                  45,954             48,083
 Raw materials and supplies                                                      151,340            132,441
 Total                                                                      $    344,957            312,950

Inventories are stated at the lower of cost or market. Cost is determined principally by the first-in, first-
out method. The valuation of inventory requires us to make judgments and estimates regarding obsolete,
damaged or excess inventory as well as current and future demand for our products. The estimates of
future demand along with analysis of usage data that we use in the valuation of inventory are the basis for
our inventory reserves and have an effect on our results of operations. We calculate inventory reserves
using a combination of a lower of cost or market analysis, an analysis of historical usage data, forecast
demand data and historical disposal rates. Lower of cost or market analysis is typically applied to those
items of inventory that represent a substantial portion of the total value of inventory on-hand. The high-
value units typically represent a small percentage of the total inventory items, so identification of
obsolescence or valuation reserve requirements for the balance of the inventory on-hand is accomplished
using either historical or forecast usage to identify slow-moving or obsolete items.




                                                      44
Note 3 - Property, Plant and Equipment
Property, plant and equipment are composed of the following:

                                                                                               June 30,
  ($000s omitted)                                                                          2006         2005
  Land                                                                      $          11,737         12,085
  Buildings and improvements                                                          244,960        213,442
  Machinery and equipment                                                             764,969        651,454
  Furniture and fixtures                                                               53,187         97,567
                                                                                    1,074,853        974,548
  Less accumulated depreciation and amortization                                     (552,918)      (482,929)
  Property, plant and equipment, net                                        $         521,935        491,619

Note 4 - Goodwill
Goodwill was $381.2 million at June 30, 2006 compared with $345.1 million at June 30, 2005. The increase
is due primarily to the acquisition of PhatNoise and our investment in a joint venture in Korea in fiscal
2006. Contingent consideration associated with the acquisition of Innovation Systems in a prior fiscal year
also contributed to the increase in goodwill. Our SFAS 142 annual impairment test concluded that
goodwill was not impaired as of the test date, April 30, 2006. There was no amortization of goodwill in
fiscal years 2006, 2005 and 2004 in accordance with SFAS No.142.

In fiscal 2005, goodwill increased $93.4 million, which was mainly due to the acquisition of QNX Software
Systems Ltd. This acquisition added $110.1 million to the goodwill balance. The increase in goodwill
during 2005 was slightly offset by $15.3 million due to realized acquired deferred tax assets. These pre-
acquisition deferred tax assets had not been previously recognized due to uncertainty regarding our ability
to utilize the related tax loss carryforwards.

Note 5 - Short-Term Borrowings
At June 30, 2006, we had outstanding short-term borrowings of $1.8 million with a weighted average
interest rate of 5.3 percent. The short-term borrowings were under unsecured lines of credit totaling
$20.7 million in Japan, China and the UK. We had $2.6 million of outstanding short-term borrowings
with a weighted average interest rate of 4.3 percent at June 30, 2005.

Note 6 - Long-Term Debt and Current Portion of Long Term-Debt
Long-term debt is comprised of the following:
                                                                                              June 30,
 ($000s omitted)                                                                   2006                     2005
 Senior notes, unsecured, due February 15, 2007
   interest due semiannually at 7.125%                                  $        13,168                  171,154
 Senior notes, unsecured, due July 1, 2007
   interest due semiannually at 7.32%                                            16,486                  140,000
 Carrying value of interest rate hedge                                               ---                   7,480
 Revolving credit facility                                                      159,900                       ---
 Obligations under capital leases (note 7)                                        2,555                    2,950
 Other unsubordinated variable rate loans due through 2016,
   bearing interest at an average effective rate of 5.00% at June 30,             3,694                    9,740
     6
 Total                                                                          195,803                  331,324
 Less current installments                                                      (16,337)                    (533)
 Long-term debt                                                         $       179,466                  330,791
                                                      45
Our long-term debt of $179.5 million at June 30, 2006, consisted of $159.9 million in borrowings under
the revolving credit facility and $16.5 million principal amount of 7.32 percent senior notes due July 1,
2007 and $3.1 million of other obligations. Our current portion of long-term debt of $16.3 million
consisted of $13.2 million principal amount of 7.125 percent senior notes due February 15, 2007, and
$3.1 million of other obligations.

During the fiscal year ended June 30, 2006, we purchased and retired $158 million of our 7.125 percent
senior notes due February 2007 at an average premium of 0.895 percent, reducing the outstanding
principal amount from $171.2 million at June 30, 2005 to $13.2 million at June 30, 2006 and resulting in
an other non-operating expense of $1.6 million. During the fiscal year ended June 30, 2006, we purchased
and retired $123.5 million of our 7.32 percent senior notes due July 2007 at an average premium of
1.628 percent, reducing the outstanding principal amount from $140.0 million to $16.5 million and
resulting in an other non-operating expense of $2.3 million.

We are a party to a $300 million multi-currency revolving credit facility with a group of banks. This
facility expires in June 2010. The interest rate on the revolving rate facility is based upon LIBOR plus 37 to
90 basis points and we pay a commitment fee of 8 to 22.5 basis points. The interest rate spread and
commitment fee are determined based upon our interest coverage ratio and senior unsecured debt rating.
At June 30, 2006, we had $159.9 million in borrowings under the revolving credit facility and outstanding
letters of credit of $6.7 million. Unused availability under the revolving credit facility was $133.4 million at
June 30, 2006.

Our long-term debt agreements contain financial and other covenants that, among other things, limit our
ability to incur additional indebtedness, restrict subsidiary dividends and distributions, limit our ability to
encumber certain assets and restrict our ability to issue capital stock of our subsidiaries. Our long-term
debt agreements permit us to pay dividends or repurchase our capital stock without any dollar limitation
provided that we would be in compliance with the financial covenants in our revolving credit facility after
giving effect to such dividend or repurchase. At June 30, 2006 and 2005, we were in compliance with the
terms of our long-term debt agreements.

Weighted average borrowings were $342.0 million, $340.3 million and $453.0 million for fiscal years
ended June 30, 2006, 2005 and 2004, respectively. The weighted average interest rate was 7.4 percent,
5.3 percent and 4.6 percent in fiscal years 2006, 2005 and 2004, respectively. Our average interest rate has
increased over the last two years. This is due to an increase in the U.S. Dollar denominated short-term
LIBOR base rates over this period. The majority of our interest expense is linked to the U.S. Dollar short-
term LIBOR rates.

Interest expense is reported net of interest income in our consolidated statement of operations. Gross
interest expense was $25.2 million, $18.1 million and $20.7 million for the fiscal years ended June 30,
2006, 2005 and 2004 respectively. Interest income was $12.2 million, $7.6 million and $3.5 million for the
fiscal years ended June 30, 2006, 2005 and 2004.

Cash paid for interest was $18.8 million, $10.2 million, and $18.7 million during the fiscal years ended
June 30, 2006, 2005 and 2004, respectively.




                                                      46
Long-term debt, including obligations under capital leases, maturing in each of the next five fiscal years is
as follows ($000s omitted):
 2007                                          $          16,337
 2008                                                     17,006
 2009                                                        540
 2010                                                    160,463
 2011                                                        486
 Thereafter                                                  971
Note 7 - Leases
The following analysis represents property under capital leases:

                                                                       June 30,
 ($000s omitted)                                              2006                      2005
 Capital lease assets                                $       6,680                    13,009
 Less accumulated amortization                              (4,151)                   (5,687)
 Net                                                 $       2,529                     7,322
At June 30, 2006, we are obligated for the following minimum lease commitments under terms of
noncancelable lease agreements:
                                                                       Capital              Operating
 ($000s omitted)                                                        leases                 leases
 2007                                                              $      500          $         39,966
 2008                                                                     507                    38,677
 2009                                                                     495                    31,320
 2010                                                                     497                    24,955
 2011                                                                     399                    17,755
 Thereafter                                                               390                    14,253
 Total minimum lease payments                                           2,788          $        166,926
 Less interest                                                           (233)
 Present value of minimum lease payments                           $    2,555

Operating lease expense was $42.0 million, $50.1 million and $65.4 million for the years ended June 2006,
2005 and 2004, respectively.

Note 8 - Fair Value of Financial Instruments

The estimated fair value of our financial instruments was determined using market information. The fair
values of cash and cash equivalents, investments, receivables, accounts payable, accrued liabilities and
short-term borrowings approximate their carrying values due to the short-term nature of these items.

Fair values of long-term debt are based on market prices where available. When quoted market prices are
not available, fair values are estimated using discounted cash flow analysis, based on our current
incremental borrowing rates for similar types of borrowing arrangements.

The carrying value and fair value of long-term debt were $195.8 million and $196.1 million, respectively,
at June 30, 2006.




                                                     47
Note 9 - Warranty Liabilities
Details of the estimated warranty liability are as follows:

                                                                               Years Ended June 30,
 ($000s omitted)                                                             2006                   2005
 Beginning balance                                                  $      48,582                    40,745
 Warranty provisions                                                       55,925                    49,919
 Warranty payments (cash or in-kind)                                      (43,739)                  (42,082)
 Ending balance                                                     $      60,768                    48,582
The warranty liabilities are included in accrued liabilities.

Note 10 - Income Taxes
The tax provisions and analysis of effective income tax rates are comprised of the following items:
                                                                                   Years Ended June 30,
 ($000s omitted)                                                           2006             2005               2004
 Provision for Federal income taxes before credits at
   statutory rate                                               $       131,665          117,368           79,632
 State income taxes                                                         211              984                8
 Difference between Federal statutory rate and
   foreign effective rate                                                (2,401)          (8,551)          (2,311)
 Dividend repatriation                                                    3,350               ---              ---
 IRS settlement                                                          (1,081)              ---              ---
 Permanent differences                                                     (524)          (4,224)             707
 Tax benefit from export sales                                           (2,186)          (2,116)          (4,777)
 Loss on foreign investment                                                  ---              ---          (1,910)
 Change in valuation allowance                                               61              544            1,423
 Change in other tax liabilities                                         (2,611)          (2,210)          (1,277)
 Reduction in deferred asset due to tax rate changes in
   foreign jurisdiction                                                      ---           3,429                ---
 Difference between Federal and financial accounting
   for incentive stock option grants                                        853              895              752
 Federal income tax credits                                              (5,168)          (3,600)          (3,000)
 Other                                                                     (292)             (30)             390
 Total                                                          $       121,877          102,489            69,637
We recorded a net release of tax contingency reserves of $2.6 million for the fiscal year ended June 30,
2006 related to a favorable U.S. tax settlement.
Income tax expense (benefit) consists of the following:
                                                                                   Years Ended June 30,
 ($000s omitted)                                                           2006             2005               2004
 Current:
   Federal                                                      $        (3,692)           5,226            1,216
   State                                                                    325              275              362
   Foreign                                                              134,610          104,658           77,601
                                                                        131,243          110,159           79,179
 Deferred:
  Federal                                                               (47,105)         (80,183)          (7,912)
  State                                                                      ---             709             (343)
  Foreign                                                                (7,754)          (2,302)         (11,106)
                                                                        (54,859)         (81,776)         (19,361)
 Charge in lieu of taxes attributable to tax benefit
  from employee stock options                                            45,493           74,106            9,819
 Total                                                          $       121,877          102,489           69,637
                                                       48
Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets
and liabilities and available tax loss and credit carryforwards.

The following deferred taxes are recorded:
Assets/(liabilities)
                                                                                        June 30,
 ($000s omitted)                                                                2006                  2005
 Federal net operating loss carryforwards                               $     31,087                36,356
 Federal tax credits                                                          26,515                10,782
 Inventory costing differences                                                 8,350                 7,056
 Capitalized research and development                                         45,659                34,573
 Foreign net operating loss carryforwards                                     13,727                15,802
 Non-qualified stock options – GAAP deductions                                10,441                 7,934
 Valuations and other allowances                                              63,550                32,351
 Total gross deferred tax asset                                         $    199,329               144,854
 Less valuation allowance                                                     (3,674)               (3,613)
 Deferred tax asset                                                     $    195,655               141,241
 Total gross deferred tax liability from fixed asset depreciation       $     (7,327)               (9,096)
 Foreign statutory accounting including royalty payments                     (15,148)              (12,469)
 Total gross deferred tax liability                                     $    (22,475)              (21,565)
 Net deferred tax asset                                                 $    173,180               119,676
We have Federal research credit, alternative minimum tax credit and foreign income tax credit
carryforwards valued at $14.1 million, $1.5 million and $11.0 million, for the fiscal years 2006, 2005, and
2004, respectively. The research credit carryforward will begin to expire in 2021. The alternative minimum
tax credit does not expire. The foreign tax credit will expire in 2016. We have U.S. Federal net operating
loss carryforwards of $88.8 million that will expire in 2026. Additionally, we have an Austrian net
operating loss carryforward of $24.4 million that will not expire and other foreign net operating loss
carryforwards of $21.2 million that begin to expire in 2009. A valuation allowance has been established for
certain of the foreign net operating loss carryforwards. Management believes the results of future
operations will generate sufficient taxable income to realize the net deferred tax asset.

The American Jobs Creation Act (“AJCA”) provided a deduction of 85 percent on certain non-U.S.
earnings that were repatriated prior to our most recent fiscal year end. We repatriated $500 million from
our German operations to the United States during fiscal 2006. The total tax expense related to the
repatriation was $3.4 million.

Cash paid for Federal, state and foreign income taxes was $135.7 million, $130.3 million and $8.5 million,
during fiscal years ended June 30, 2006, 2005 and 2004, respectively.

Accrued income taxes payable were $116.5 million and $105.9 million as of June 30, 2006 and 2005,
respectively. The deferred tax asset is recorded in other current assets and other assets on the balance
sheet.

During the fiscal year ended June 30, 2006, we generated income before income taxes of $47.5 million
from our operations in the United States and $328.7 million from our international operations.

Note 11 - Stock Option and Incentive Plan
On June 30, 2006, we had one share-based compensation plan with shares available for future grants, the
2002 Option Plan, which is described below. The compensation expense for share-based compensation
                                                      49
was $16.6 million, $14.3 million and $10.9 million for the years ended June 30, 2006, 2005 and 2004,
respectively. The total income tax benefit recognized in the income statement for share-based
compensation arrangements was $4.8 million, $4.1 million and $3.2 million for the years ended June 30,
2006, 2005 and 2004, respectively.

Option Plan

Our 2002 Option Plan, which was approved by our shareholders, permits the grant of stock options, stock
appreciation rights and restricted stock for up to 6,000,000 shares of our common stock. These shares may
be issued as original issuances, treasury shares or a combination of both. We believe that such awards
better align the interests of our employees with those of our shareholders. Option awards are granted with
an exercise price equal to the market price of our stock on the date of the grant. The option awards
generally vest over five years of continuous service commencing one year from the date of the grant, and
expire after ten years. At June 30, 2006, a total of 4,186,392 shares of Common Stock were available for
grant under the 2002 Plan.

A grant of restricted stock involves the immediate transfer of ownership of a specified number of shares of
Common Stock with a “substantial risk of forfeiture” for a period of at least three years. The participant
that receives a restricted stock grant is entitled immediately to voting, dividend and other share ownership
rights associated with the restricted stock. At June 30, 2006, a total of 37,000 shares of Restricted Common
Stock were granted pursuant to the terms of the 2002 Plan.

Stock appreciation rights allow the holders to receive a predetermined percentage of the spread between
the option price and the fair market value of the shares on the date of exercise. A performance unit is the
equivalent of $100 and is awarded for the achievement of specified management objectives as a condition
to the payment of the award. The performance period will not be less than three years. No stock
appreciation right or performance unit grants have been made under the 2002 Plan.

We also have options outstanding under our 1992 Plan. Shares under the 1992 Plan can be issued as
original issuances or treasury shares or a combination of both. Options to purchase 1,746,670 shares with
expiration dates ranging from September 5, 2006 to November 8, 2012 are outstanding under our 1992
Plan. The 1992 Plan was approved by our shareholders and had no shares available for grant on June 30,
2006.

Adoption of SFAS No. 123R
Effective July 1, 2005, we adopted SFAS No. 123R, Accounting for Stock-Based Compensation, using the
modified prospective method. Under SFAS No. 123R, our compensation expense is recognized based on
the estimated fair value of stock options and similar equity instruments awarded to employees. The effect
of adopting SFAS No. 123R was not material to our income from continuing operations and net income
for the year ended June 30, 2006, and the cumulative effect of adoption using the modified-prospective
method was similarly not material. Prior to fiscal 2006, we have been recording compensation expense
associated with stock options in accordance with SFAS No. 123 since July 1, 2002. The primary impact of
SFAS No. 123R was on our disclosure and certain calculations as we now are required to use estimated
forfeitures rather than actual forfeitures as we had prior to the adoption of SFAS No. 123R.

Prior to the adoption of SFAS No. 123R, we presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS No.
123R requires the cash flows related to tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be classified as financing cash
                                                     50
flows. Accordingly, we have classified the $45.5 million excess tax benefit realized in the year ended June
30, 2006 as cash flow from financing activity in the accompanying consolidated statements of cash flows.

FASB issued FSP No. FAS 123R-3, Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards, on November 10, 2005. We elected to adopt the alternative transition method provided
in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS
123R. The alternative transition method includes simplified methods to establish the beginning balance of
the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based
compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of
cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon
adoption of SFAS 123R.

Fair Value Determination

The fair value of each option award is estimated on the date of grant using the Black-Scholes option
valuation model, which uses the assumptions noted in the following table.
                                                                   Years ended June 30,
                                                               2006            2005                 2004
 Expected volatility                                35.0% − 43.0%            41.0%                41.0%
 Weighted-average volatility                                 38.7%           41.0%                41.0%
 Expected annual dividend                                     $0.05           $0.05                $0.05
 Expected term (in years)                               1.90 – 8.33            6.13                 6.17
 Risk-free rate                                     4.05% – 5.24%            3.69%                3.29%

Groups of option holders (directors, executives and non-executives) that have similar historical behavior
are considered separately for valuation purposes. Expected volatilities are based on historical closing prices
of our common stock over the expected option term. We use historical data to estimate option exercises
and employee terminations within the valuation model. The expected term of options granted is derived
using the option valuation model and represents the estimated period of time from the date of grant that
the option is expected to remain outstanding. The risk-free rate for periods within the contractual life of
the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock Option Activity

A summary of option activity under our stock option plans as of June 30, 2006 and changes during the
year is presented below:
                                                                          Weighted
                                                    Weighted               average
                                                     average             remaining           Aggregate
                                                     exercise          contractual            intrinsic
                                   Shares               price          term(years)               value
 Outstanding at
  July 1, 2005                  4,624,000            $    32.09
  Granted                         673,000                 83.65
  Exercised                    (1,693,000)                19.80
  Forfeited or expired           (304,000)                52.14
 Outstanding at
  June 30, 2006                 3,300,000                 47.04                6.40           $132,326
 Exercisable at
  June 30, 2006                 1,523,000            $    24.14                4.65           $ 94,096

                                                     51
The weighted-average grant-date fair value of options granted during the years ended June 30, 2006, 2005
and 2004 was $31.87, $45.49 and $26.72, respectively. The total intrinsic value of options exercised during
the years ended June 30, 2006, 2005 and 2004 was $147.2 million, $231.7 million and $41.8 million,
respectively.

A summary of the status of our nonvested restricted stock shares as of June 30, 2006 and changes during
the year ended June 30, 2006, is presented as follows:
                                                                        Weighted average
                                                                              grant-date
                                                          Shares               fair value
 Nonvested at July 1, 2005                                 ---                       ---
  Granted                                              37,000                     $85.36
  Vested                                                   ---                       ---
  Forfeited                                                ---                       ---
 Nonvested at June 30, 2006                            37,000                     $85.36

As of June 30, 2006, there was $2.2 million of total unrecognized compensation cost related to nonvested
restricted share-based compensation arrangements granted under the plan. The weighted average
recognition period is 2.61 years. No restricted shares vested in the years ended June 30, 2006, 2005 and
2004.

Pro Forma Disclosure

We adopted SFAS No. 123R in July 2005 and SFAS No. 123 in July 2002. Prior to fiscal 2003, we
accounted for expense under the stock option plans according to the provisions of APB No. 25 and related
interpretations. During fiscal 2004 and 2005 under SFAS No. 123, options granted in fiscal years prior to
fiscal 2003 were accounted for using the intrinsic value method as described in APB No. 25, Accounting for
Stock Issued to Employees. The following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based
Compensation, to all of our outstanding and unvested awards in fiscal 2004 and 2005. For fiscal 2006 we
expensed all options under SFAS No. 123R.
                                                                   Years Ended June 30,
($000s omitted except per share amounts)                              2005        2004 (a)
Reported net income                                        $       232,848         157,883
Add: Stock based employee compensation expense
included in reported net income, net of tax                         10,345            7,906
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax                                          11,449           9,802
Net income, pro forma                                      $       231,744         155,987
Basic earning per share, as reported                       $           3.47            2.40
Basic earnings per share, pro forma                                    3.45            2.37
Diluted earnings per share, as reported                    $           3.31            2.27
Diluted earnings per share, pro forma                                  3.29            2.24

(a) Basic and diluted earnings per share have been adjusted to reflect the two-for-one stock split in
November 2003.

                                                     52
Note 12 - Pension and Other Postretirement Benefits
We provide a Retirement Savings Plan for certain employees in the United States. Under the plan,
employees may contribute up to 50 percent of their pretax compensation subject to certain limitations.
Each business unit will make a safe harbor non-elective contribution in an amount equal to three percent
of a participant’s eligible contribution. Upon approval of the Board of Directors, each business unit may
make a matching contribution of up to three percent (50 percent on the first six percent of an employee’s
tax-deferred contribution) and a profit sharing contribution. Matching and profit sharing contributions
vest at a rate of 25 percent for each year of service with the employer, beginning with the second year of
service. Expenses related to the Retirement Savings Plan for the years ended June 30, 2006, 2005 and 2004
were $13.3 million, $11.6 million and $10.1 million, respectively.

In addition, we provide defined benefit pension and other postretirement benefits to certain eligible
employees. The measurement date used for determining pension and other postretirement benefits is the
last day of our fiscal year-end, June 30.

Pension benefits. We have certain business units outside the United States that maintain defined benefit
pension plans for many of our current and former employees. The coverage provided and the extent to
which the retirees’ share in the cost of the program vary by business unit. Generally, plan benefits are
based on age, years of service, and average compensation during the final years of service.

The accumulated benefit obligation for the defined benefit pension plans was $49.1 million at June 30,
2006 and $43.8 million at June 30, 2005. The accumulated benefit obligation is the actuarial present value
of benefits attributed to employee services rendered to date excluding assumptions about future
compensation levels.

At June 30, 2006, the defined benefit pension plan assets were invested in equity securities. During fiscal
2007, our business units outside of the United States expect to contribute an immaterial amount to the
defined benefit pension plans. The benefits that we expect to pay in each fiscal year from 2007 to 2011 are
$1.5 million, $2.4 million, $1.8 million, $1.9 million and $2.0 million, respectively. The aggregate benefits
that we expect to pay in the five fiscal years from 2012 to 2016 are $11.3 million.

Other postretirement benefits. We have an unfunded Supplemental Executive Retirement Plan (“SERP”)
that provides retirement, death and termination benefits, as defined, to certain key executives designated
by the Board of Directors. The accumulated benefit obligation for the SERP was $50.2 million at June 30,
2006 and $43.9 million at June 30, 2005.

Our expenses related to the SERP for the years ended June 30, 2006, 2005 and 2004 were $6.5 million,
$6.3 million and $4.4 million, respectively. The benefits that we expect to pay in each fiscal year from 2007
to 2011 are $2.2 million, $3.8 million, $3.8 million, $3.8 million and $3.8 million, respectively. The
aggregate benefits we expect to pay in the five fiscal years from 2012 to 2016 are $22.8 million.




                                                     53
The following is a reconciliation of the benefit obligations, plan assets and funded status of the plans as
well as the amounts recognized on the balance sheet:
                                                                                    Other postretirement
                                                  Pension benefits                        benefits
June 30, ($000s omitted)                          2006             2005              2006             2005
Change in benefit obligation:
Benefit obligation at beginning
  of year                           $     45,402                 37,952             48,244              34,767
Service cost                               1,126                  1,180               1,553              1,503
Interest cost                              1,889                  2,047               2,465              2,356
Amendments                                     ---                 (677)              2,380              1,114
Actuarial (gain) loss                     (1,508)                 6,947               (938)              9,213
Asset transfer                              3,423                     ---                ---                 ---
Benefits paid                             (1,694)                (1,358)            (1,037)               (709)
Foreign currency exchange rate
  changes                                   2,754                  (689)                ---                 ---
Benefit obligation at end of year   $     51,392                 45,402              52,667             48,244
Change in plan assets:
Fair value of assets at beginning
  of year                           $      2,159                  1,782                 ---                 ---
Actual return on plan assets                  302                   317                 ---                 ---
Asset transfer                              (409)                    ---                ---                 ---
Employer contributions                         22                    74              1,037                 709
Benefits paid                                  ---                   ---            (1,037)               (709)
Foreign currency exchange rate
  changes                                     122                   (14)                 ---                  ---
Fair value of assets at end of year $      2,196                  2,159                  ---                  ---
Reconciliation of funded status:
Funded status                       $ (49,196)                  (43,243)           (52,667)            (48,244)
Unrecognized prior service cost                ---                   ---             7,100               5,449
Unrecognized net loss                      3,083                  4,854             19,812              22,500
Accrued pension cost                $ (46,113)                  (38,389)           (25,755)            (20,295)
Amounts recognized on the balance sheet:
Other current assets                $          ---                  387                 ---                 ---
Accrued liabilities                      (46,934)               (42,540)           (50,202)            (43,891)
Other assets                                   ---                   ---             7,100               5,449
Accumulated other comprehensive
  income                                      821                 3,764             17,347              18,147

Accrued pension cost                    $       (46,113)        (38,389)           (25,755)            (20,295)

Presented below are the components of net periodic pension and other postretirement benefit costs for
fiscal years ending June 30, 2006, 2005 and 2004:
                                                                                    Other postretirement
                                             Pension benefits                             benefits
 ($000s omitted)                        2006         2005           2004         2006       2005         2004
 Components of net
   periodic benefit cost:
    Service cost                $      1,126           1,180         999         1,553         1,503      1,274
    Interest cost                      1,889           2,047       1,827         2,465         2,356      1,618
    Expected return on plan
      assets                            (99)           (330)        (176)          ---          ---           ---
    Amortization of prior
      service cost                        ---          (676)         304           728           693        764
    Amortization of net loss             252             106       2,529         1,751         1,778        708
 Net periodic benefit cost      $      3,168           2,327       5,483         6,497         6,330      4,364
                                                           54
The following table presents the assumptions used to determine our benefit obligations and net periodic
pension and other postretirement benefit costs:
                                                                                  Other postretirement
                                              Pension benefits                          benefits
 June 30,                              2006            2005        2004       2006        2005           2004
 Assumptions:
 Weighted average used to
   determine benefit
   obligations at June 30:
 Discount rates for pension
   plans may vary between              4.6%            4.2%         5.0%
   foreign subsidiaries            to 4.75%        to 4.75%      to 5.5%     6.25%         5.1%          6.2%
 Rate of compensation increase
   for pension plans may vary          2.0%            2.0%         2.0%
   between foreign subsidiaries     to 3.0%         to 3.0%      to 4.5%       4.0%        4.0%          4.0%
 Weighted average used to
   determine net periodic
   benefit cost at June 30:
 Discount rates for pension
   plans may vary between              4.6%            4.2%         5.0%
   foreign subsidiaries            to 4.75%        to 4.75%      to 5.5%       5.1%        6.2%          5.9%
 Expected long-term return
   on plan assets                      5.5%           5.5%         5.5%          ---         ---          ---
 Rate of compensation increase
   for pension plans may vary          2.0%            2.0%         2.0%
   between foreign subsidiaries     to 3.0%         to 3.0%      to 4.5%       4.0%        4.0%          4.0%


We rely on historical long-term rates of return by asset class, the current long-term U.S. Treasury bond
rate, and the current and expected asset allocation strategy to determine the expected long-term rate of
return assumptions. The discount rate used for our pension benefits are primarily based on yields for
German federal bonds and Euro denominated bonds provided by Deutsche Bundesbank. The discount
rate for other postretirement benefits was derived based on the anticipated cash flow of the plan and the
spot yields on corporate bonds published in the Citigroup Pension Liability Index as of June 30, 2006. The
rates used represent the single rate which produces the same percent value of cash flow as the bond yield
curve in the Index.

Note 13 – Business Segment Data
We design, manufacture and market high-quality, high fidelity audio products and electronic systems for
the automotive, consumer and professional markets. We organize our businesses into reporting segments
by the end-user markets served. Our chief operating decision maker evaluates performance and allocates
resources based on net sales, operating income and working capital in each of the reporting segments.
We report on the basis of three segments: Automotive, Consumer and Professional.

Our Automotive segment designs, manufactures and markets audio, electronic and infotainment systems
for vehicle applications primarily to be installed as original equipment by automotive manufacturers.
Our automotive products and systems are marketed worldwide under brand names including JBL,
Infinity, Harman/Kardon, Becker, Logic 7 and Mark Levinson. Our premium branded audio, video,
navigation and infotainment systems are offered to automobile manufacturers through engineering and
supply agreements.

Net sales to DaimlerChrysler accounted for approximately 24.9 percent, 25.5 percent and 28.5 percent of
consolidated net sales for the years ended June 30, 2006, 2005 and 2004, respectively. Accounts receivable


                                                      55
due from DaimlerChrysler accounted for 19.5 percent and 21.7 percent of total consolidated accounts
receivable at June 30, 2006 and 2005, respectively.

Net sales to BMW accounted for approximately 10.0 percent, 10.9 percent and 12.8 percent of
consolidated net sales for the years ended June 30, 2006, 2005 and 2004, respectively. Accounts receivable
due from BMW accounted for 6.7 percent and 8.2 percent of total consolidated accounts receivable at
June 30, 2006 and 2005, respectively.

Our Consumer segment designs, manufactures and markets audio, video and electronic systems for home,
computer and multimedia applications. Our Consumer home products and systems are marketed
worldwide under brand names including JBL, Infinity, Harman/Kardon, Lexicon, Mark Levinson and
Revel. Our audio and electronic products are offered through audio/video specialty and retail chain stores.
Our branded audio products for computer and multimedia applications are focused on retail customers
with products designed to enhance sound for computers, Apple’s iPod and other music control players.

The Professional Group designs, manufactures and markets loudspeakers and electronic systems used by
audio professionals in concert halls, stadiums, airports and other buildings and for recording, broadcast,
cinema and music reproduction applications. Our Professional products are marketed worldwide under
brand names including JBL, Professional, AKG, Crown, Soundcraft, Lexicon, Digitech, dbx and Studer.
We provide high-quality products to the sound reinforcement, music instrument support and broadcast
and recording segments of the professional audio market. We offer complete systems solutions for
professional installations and users around the world.




                                                    56
The following table reports net sales, operating income (loss), assets, goodwill, capital expenditures and
depreciation and amortization by each reporting segment:

                                                    Years Ended June 30,
 ($000s omitted)                            2006             2005                2004
 Net sales:
    Automotive                      $ 2,236,379           2,125,566         1,873,047
    Consumer                            494,230             418,347           356,611
    Professional                        517,288             486,976           481,716
 Total                              $ 3,247,897           3,030,889         2,711,374

 Operating income (loss):
   Automotive                       $    337,746            348,077           308,923
   Consumer                               49,862             26,715           (13,029)
   Professional                           59,278             45,498             9,892
   Other                                 (49,645)           (69,309)          (51,321)
 Total                              $    397,241            350,981           254,465

 Assets:
   Automotive                       $ 1,454,846           1,445,943         1,214,768
   Consumer                             279,045             233,482           208,254
   Professional                         291,155             250,931           269,812
   Other                                329,615             256,847           295,976
 Total                              $ 2,354,661           2,187,203         1,988,810

 Goodwill:
   Automotive                       $     301,499           270,695            176,938
   Consumer                                35,531            30,782             30,903
   Professional                            44,189            43,594             43,881
 Total                              $     381,219           345,071            251,722

 Capital expenditures:
   Automotive                       $    105,544            138,373           107,448
   Consumer                                8,549              8,037             7,895
   Professional                           15,492             24,035            19,838
   Other                                     963              1,881               312
 Total                              $    130,548            172,326           135,493

 Depreciation and amortization:
   Automotive                   $         99,261             87,445            69,650
   Consumer                               11,490              9,602            18,215
   Professional                           17,181             19,073            15,706
   Other                                   2,017              2,545             2,461
 Total                          $        129,949            118,665           106,032

Other primarily includes activity related to our corporate accounts.




                                                     57
Below we present sales, long-lived assets and net assets by geographic area as of and for the years ended
June 30, 2006, 2005 and 2004. Net sales are attributable to geographic areas based upon the location of the
business unit executing the sale.

                                           Years Ended June 30,
($000s omitted)                     2006            2005               2004
Net sales:
   U.S.                    $   708,564            633,780           645,762
   Germany                   1,415,871          1,335,720         1,149,862
   Other Europe                578,401            573,133           468,222
   Other                       545,061            488,256           447,528
Total                      $ 3,247,897          3,030,889         2,711,374

Long-lived assets:
  U.S.                     $   383,406            303,806           244,658
  Germany                      444,063            412,979           402,330
  Other Europe                 113,288            118,651           114,639
  Other                        164,547            168,474            23,148
Total                      $ 1,105,304          1,003,910           784,775

Net Assets
  U.S.                     $   385,096             23,706           176,847
  Germany                      353,572            632,383           462,439
  Other Europe                 276,738            211,759           194,724
  Other                        212,758            193,100            40,986
Total                      $ 1,228,164          1,060,948           874,996

Note 14 - Commitments and Contingencies

At June 30, 2006, we were involved in several legal actions. The outcome of these legal actions cannot be
predicted with certainty. However, management, based upon advice from legal counsel, believes such
actions are either without merit or will not have a material adverse effect on our financial position or
results of operations. In fiscal 2005, we recorded a $6 million liability for probable unasserted claims.
There was no change in the status of these claims at June 30, 2006. As such, this amount continues to be
accrued at June 30, 2006.

At June 30, 2006, our Board of Directors had authorized the repurchase of a total of up to 20 million
shares of common stock. Through June 30, 2006, we had acquired and placed in treasury 16,690,182
shares of our common stock at a total cost of $510.8 million. We expect future share repurchases to be
funded primarily with cash generated by operations.

Note 15 - Derivatives

We use foreign currency forward contracts to hedge a portion of our forecasted transactions. These
forward contracts are designated as foreign currency cash flow hedges and recorded at fair value in the
accompanying consolidated balance sheet with a corresponding entry to other accumulated
comprehensive income (loss) until the underlying forecasted foreign currency transaction occurs.

When the transaction occurs, the gain or loss from the derivative designated as a hedge of the transaction
is reclassified from accumulated other comprehensive income (loss) to the same income statement line
item in which the foreign currency gain or loss on the underlying hedged transaction is recorded. When it
                                                    58
becomes apparent that an underlying forecasted transaction will not occur, the amount recorded in
accumulated other comprehensive income (loss) related to the hedge is reclassified to the miscellaneous,
net line of the income statement in the then-current period.

Because the amounts and the maturities of the derivatives approximate those of the forecasted exposures,
changes in the fair value of the derivatives are highly effective in offsetting changes in the cash flows of the
hedged items. Any ineffective portion of the derivative is recognized in current earnings. When it has been
determined that a hedge has become ineffective, the ineffective portion of the hedge is recorded in current
earnings.

At June 30, 2006, we had contracts designated as foreign currency cash flow hedges maturing through
June 2007 to sell Euros and purchase US Dollars of approximately $67.5 million to hedge future foreign
currency purchases. At June 30, 2006, the amount associated with these hedges that is expected to be
reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve
months is a loss of approximately $3.3 million. This amount also represents the fair market value of
foreign currency forward contracts at June 30, 2006. In fiscal 2006, we recognized approximately
$6.1 million in net gains from cash flow hedges of forecasted foreign currency transactions compared to
$2.7 million in net losses during fiscal 2005.

The swap contracts to effectively convert interest on $140 million of the principal amount of our 7.32
percent senior notes due July 1, 2007, from a fixed rate to a floating rate, were terminated in June 2006 in
conjunction with our tender offer for the 7.32 percent senior notes, resulting in a net loss recorded of
$0.8 million.

The swap contracts to effectively convert interest on $170 million of the principal amount of our 7.125
percent senior notes due February 15, 2007, from a fixed rate to a floating rate, were terminated in June
2006 in conjunction with our tender offer for the 7.125 percent notes, resulting in a net loss recorded of
$0.3 million.

As of June 30, 2006, we had contracts maturing through June 2007 to purchase and sell the equivalent of
$31.6 million of various currencies to hedge foreign currency denominated loans to foreign subsidiaries.
These loans are of a long-term investment nature and are not designated as cash flow hedges. Adjustments
to the carrying value of the foreign currency forward contracts offset the gains and losses on the
underlying loans. At June 30, 2006, the market value on these contracts was a net loss of $0.6 million.

Note 16 - Acquisitions

In July 2005, we acquired PhatNoise, Inc. located in Los Angeles, California. PhatNoise develops
integrated digital media systems for the automotive environment. The acquisition of PhatNoise is not
material to our consolidated financial statements.

In November 2004, we acquired QNX Software Systems Ltd, which is headquartered in Ottawa, Canada.
QNX is a provider of real time operating system software, development tools, and services for embedded
design systems. Our infotainment systems utilize the QNX operating system. The acquisition allows the
optimization of our software by fully integrating the operating system, the basic framework and the
applications. The purchase price, net of cash acquired, was $139 million. Approximately $110 million was
allocated to goodwill and $5 million was allocated to amortizable intangibles.




                                                       59
Note 17 - Investment in Joint Venture

In October 2005, we formed Harman Navis Inc., a joint venture located in Korea, to engage in the design
and development of navigation systems for Asian markets. We evaluated the joint venture agreement
under FIN No. 46R, Consolidation of Variable Interest Entities, and determined that the newly formed joint
venture was a variable interest entity requiring consolidation. We own a 50 percent equity interest in the
joint venture. We are not obligated to fund any joint venture losses. At June 30, 2006, the net assets of the
joint venture were approximately $19 million. The minority interest is approximately $3 million. Our
investment in this joint venture is not material to our consolidated financial statements.

Note 18 - Earnings Per Share Information

                                                                  Years Ended June 30,
($000s omitted except per share amounts)           2006                    2005                   2004
                                           Basic      Diluted      Basic      Diluted     Basic      Diluted
Net income                         $ 255,295          255,295      232,848    232,848    157,883         157,883
Shares of common stock outstanding    66,260           66,260       67,120     67,120     65,779          65,779
Employee stock options                    ---           1,845           ---     3,279         ---          3,708
Total average equivalent shares       66,260           68,105       67,120     70,399     65,779          69,487
Earnings per share                 $    3.85             3.75         3.47       3.31       2.40            2.27
For all periods presented, share and per share amounts have been restated to reflect the two-for-one stock
split in November 2003.

Certain options were outstanding and not included in the computation of diluted net earnings per share
because the assumed exercise of these options would have been antidilutive. Options to purchase 867,808
shares of our common stock with exercise prices ranging from $75.22 to $126.94 per share at June 30,
2006 were outstanding and not included in the computation of diluted earnings per share because the
exercise of these options would have been antidilutive.

Options to purchase 385,275 shares of our common stock with exercise prices ranging from $75.22 to
$126.94 per share were not included at June 30, 2005; options to purchase 498,889 shares with exercise
prices ranges from $50.03 to $75.22 per share were not included at June 30, 2004, in each case because the
exercise of these options would have been antidilutive.

Note 19 - Quarterly Summary of Operations (unaudited)
The following is a summary of operations by quarter for fiscal 2006 and 2005:
($000s omitted except per share amounts)                           Three months ended
Fiscal 2006                                    September 30     December 31      March 31                June 30
Net sales                                  $        754,648         832,645        801,487               859,117
Gross profit                               $        266,295         305,769        281,617               298,889
Net income                                 $         53,967          72,535         64,026                64,767
Earnings per share – basic                 $           0.82            1.10           0.96                  0.97
Earnings per share – diluted               $           0.79            1.07           0.94                  0.95
Fiscal 2005
Net sales                                  $        691,706         788,587        742,564               808,032
Gross profit                               $        221,399         278,490        249,992               281,821
Net income                                 $         33,672          65,425         63,516                70,235
Earnings per share – basic                 $           0.51            0.97           0.94                  1.05
Earnings per share – diluted               $           0.48            0.92           0.90                  1.01
                                                      60
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

Under the supervision and with the participation of our management, including our Executive Chairman,
Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934) as of the end of the period covered by
this Annual Report on Form 10-K. Based on that evaluation, our Executive Chairman, Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in Securities and Exchange Commission rules and forms. We note that
the design of any system of controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving our stated goals
under all potential future conditions.

Change in Internal Control Over Financial Reporting:

There has not been any change in our internal control over financial reporting (as defined in Rules 13a-
15(f) and 15d-15(f) as promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934) during our most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

Part III
Item 10. Directors and Executive Officers of the Registrant

Certain information required by Part III, Item 10 with respect to our directors is incorporated by
reference to the information included under the caption “Proposal for Election of Directors” in our Proxy
Statement for the 2006 Annual Meeting of Shareholders. Information required by Item 10 with respect to
our executive officers is included in Part I of this report.

The information required by Part III, Item 10 with respect to compliance with Section 16 of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the information included under the
caption “Section16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2006
Annual Meeting of Shareholders.

The information required by Part III, Item 10 with respect to our audit committee and our audit
committee financial expert is set forth in our Proxy Statement for the 2006 Annual Meeting of
Shareholders in the first paragraph under the caption “The Board, its Committees and its Compensation –
Audit Committee,” which paragraph is incorporated herein by reference.

                                                       61
The information required by Part III, Item 10 with respect to our Code of Ethics for Executive and
Financial Officers and Directors is posted on our website at www.harman.com in the Investor Relations
section under Corporate Governance – “Code of Ethics for Senior Management and the Board.” We will
post information regarding any amendment to, or waiver from, our Code of Ethics for Executive and
Financial Officers and Directors on our website in the Investor Relations section under Corporate
Governance.

Item 11. Executive Compensation

The information required by Part III, Item 11 is incorporated by reference to the information provided
under the captions “Compensation of Executive Officers” and “The Board, its Committees and its
Compensation – Director Compensation” in our Proxy Statement for the 2006 Annual Meeting of
Shareholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters

The information required by Part III, Item 12 is incorporated by reference to the information provided
under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information” in our Proxy Statement for the 2006 Annual Meeting of Shareholders.

Item 13. Certain Relationships and Related Transactions

The information required by Part III, Item 13 is incorporated by reference to the information provided
under the caption “Compensation of Executive Officers – Certain Relationships and Related
Transactions” in our Proxy Statement for the 2006 Annual Meeting of Shareholders.

Item 14. Principal Accountant Fees and Services

The information required by Part III, Item 14 with respect to the fees and services of KPMG LLP, our
independent auditor, is incorporated by reference to the information included under the caption
“Independent Auditor” in our Proxy Statement for the 2006 Annual Meeting of Shareholders.

Part IV
Item 15. Exhibits and Financial Statement Schedules

We will furnish you, without charge, a copy of any exhibit upon written request. Written requests to
obtain any exhibit should be sent to the Company’s Secretary at 8500 Balboa Boulevard, Northridge,
California 91329.




                                                   62
The following consolidated financial statements are filed as part of this report under “Part II, Item 8 – Financial
Statements and Supplementary Data”:
        Financial Statements:                                                                                         Page
        Management’s Report on Internal Control over Financial Reporting                                              32
        Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting          33
        Report of Independent Registered Public Accounting Firm                                                       34
        Consolidated Balance Sheets as of June 30, 2006 and 2005                                                      35
        Consolidated Statements of Operations for the years ended June 30, 2006, 2005 and 2004                        36
        Consolidated Statements of Cash Flows for the years ended June 30, 2006, 2005 and 2004                        37
        Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended
        June 30, 2006, 2005 and 2004                                                                                  38
        Notes to Consolidated Financial Statements.                                                                   39

        Financial Statement Schedules:
        Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves.                                    66
        (Schedules I, III, IV and V are not applicable and have therefore been omitted.)
        Exhibits:
  3.1   Restated Certificate of Incorporation of the Company, as amended. (filed as Exhibit 3.1 to the Quarterly Report
        on Form 10-Q for the quarter ended December 31, 2003, Commission File No. 001-09764, and hereby
        incorporated by reference)
  3.2   By-Laws of the Company, as amended, dated June 10, 2004. (filed as Exhibit 3.2 to the Annual Report on Form
        10-K for the fiscal year ended June 30, 2004, Commission File No. 001-09764, and hereby incorporated by
        reference)
  4.3   Rights Agreement, dated as of December 13, 1999, between the Company and ChaseMellon Shareholder
        Services, L.L.C., as rights agent (including a Form of Certificate of Designation of Series A Junior Participating
        Preferred Stock, a Form of Right Certificate and a Summary of Rights to Purchase Preferred Stock). (filed as
        Exhibit 4.1 to the Form 8-A filed with the Commission on December 16, 1999, Commission File No. 001-09764,
        and hereby incorporated by reference)
  4.4   Certificate of Designation of Series A Junior Participating Preferred Stock of the Company, dated January 11,
        2000. (filed as Exhibit 4.3 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000,
        Commission File No. 001-09764, and hereby incorporated by reference)
 10.1   Amended and Restated Multi-Currency, Multi-Option Credit Agreement, dated June 22, 2006, among the
        Company, Harman Holding GmbH & Co. KG and the several lenders and agents from time to time parties
        thereto. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on June 26, 2006,
        Commission File No. 001-09764, and hereby incorporated by reference)
 10.2   Guarantee, dated June 22, 2006, in favor of JPMorgan Chase Bank, N.A., as administrative agent for the several
        banks and other financial institutions or entities from time to time parties to the Amended and Restated Multi-
        Currency, Multi-Option Credit Agreement, dated as of June 22, 2006. (filed as Exhibit 10.2 to the Current Report
        on Form 8-K filed with the Commission on June 26, 2006, Commission File No. 001-09764, and hereby
        incorporated by reference)
 10.3   Share Purchase Agreement, dated October 26, 2004, among Harman Canada Co. and certain shareholders of
        QNX Software Systems Ltd. (filed as Exhibit 10-1 to the Quarterly Report on Form 10-Q for the quarter ended
        September 30, 2004, Commission File No. 001-09764, and hereby incorporated by reference)
 10.4   Harman International Industries, Incorporated 1992 Incentive Plan, as amended and restated. (filed as Exhibit B
        to the Company’s 1999 Proxy Statement, Commission File No. 001-09764, and hereby incorporated by
        reference) **
 10.5   Harman International Industries, Incorporated Amended and Restated 2002 Stock Option and Incentive
        Plan. ** +
 10.6   Form of Harman International Industries, Incorporated 2002 Stock Option and Incentive Plan Nonqualified
        Stock Option Agreement for Non-Officer Directors. (filed as Exhibit 10.11 to the Annual Report on Form 10-K
        for the fiscal year ended June 30, 2005, Commission File No. 001-09764, and hereby incorporated by
        reference) **
 10.7   Form of Harman International Industries, Incorporated 2002 Stock Option and Incentive Plan Incentive Stock
        Option Agreement for Officers and Key Employees. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed
        with the Commission on August 22, 2005, Commission File No. 001-09764, and hereby incorporated by
        reference) **
 10.8   Form of Harman International Industries, Incorporated 2002 Stock Option and Incentive Plan Nonqualified
        Stock Option Agreement for Officers and Key Employees. (filed as Exhibit 10.2 to the Current Report on Form 8-
        K filed with the Commission on August 22, 2005, Commission File No. 001-09764, and hereby incorporated by
        reference) **
                                                           63
 10.9   Form of Harman International Industries, Incorporated 2002 Stock Option and Incentive Plan Restricted Stock
        Agreement for Officers and Key Employees. (filed as Exhibit 10.3 to the Current Report on Form 8-K filed with
        the Commission on August 22, 2005, Commission File No. 001-09764, and hereby incorporated by reference) **
10.10   Form of Harman International Industries, Incorporated 2002 Stock Option and Incentive Plan Restricted Share
        Unit Agreement for Officers and Key Employees. (filed as Exhibit 10.3 to the Current Report on Form 8-K filed
        with the Commission on August 15, 2006, Commission File No. 001-09764, and hereby incorporated by
        reference) **
10.11   Harman International Industries, Incorporated 2002 Key Executive Officers Bonus Plan. (filed as Exhibit A to the
        Company’s 2002 Proxy Statement, Commission File No. 001-09764, and hereby incorporated by reference) **
10.12   Harman International Industries, Incorporated Supplemental Executive Retirement Plan, as amended and
        restated as of October 1, 1999. (filed as Exhibit 10.27 to the Annual Report on Form 10-K for the fiscal year ended
        June 30, 2000, Commission File No. 001-09764, and hereby incorporated by reference) **
10.13   Amendment No. 1 to the Harman International Industries, Incorporated Supplemental Executive Retirement
        Plan, dated September 24, 2002. (filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended
        December 31, 2002, Commission File No. 001-09764, and hereby incorporated by reference) **
10.14   Form of Benefit Agreement under the Supplemental Executive Retirement Plan. ** +
10.15   Harman International Industries, Inc. Deferred Compensation Plan, effective June 1, 1997. (filed as Exhibit 4 to
        the Registration Statement on Form S-8 (Reg. No. 333-28793) filed with the Commission June 9, 1997, and
        hereby incorporated by reference) **
10.16   Amendment No. 1 to the Harman International Industries, Inc. Deferred Compensation Plan dated October 1,
        1999. (filed as Exhibit 10.46 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000,
        Commission File No. 001-09764, and hereby incorporated by reference) **
10.17   Amendment No. 2 to the Harman International Industries, Inc. Deferred Compensation Plan, effective December
        16, 2003. (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended December 31, 2003,
        Commission File No. 001-09764, and hereby incorporated by reference) **
10.18   Employment Agreement between Harman Management GmbH and Helmut Schinagel (filed as Exhibit 10.1 to the
        Current Report on Form 8-K filed with the Commission on August 15, 2006, Commission File No. 001-09764,
        and hereby incorporated by reference) **
10.19   Letter Agreement, dated June 3, 2005, between Harman International Industries, Incorporated and Kevin L.
        Brown **+
10.20   Employment Agreement between the Company and Dr. Erich A. Geiger, effective as of July 1, 2003. (filed as
        Exhibit 10.27 to the Annual Report on form 10-K for the fiscal year ended June 30, 2003, Commission File No.
        001-09764, and hereby incorporated by reference) **
10.21   Amendment to Employment Agreement between the Company and Dr. Erich A. Geiger, effective as of August 1,
        2004. (filed as Exhibit 10.24 to the Annual Report on form 10-K for the fiscal year ended June 30, 2004,
        Commission File No. 001-09764, and hereby incorporated by reference) **
10.22   Employment Agreement between the Company and William S. Palin, dated as of October 24, 2003. (filed as
        Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Commission File
        No. 001-09764, and hereby incorporated by reference) **
10.23   Form of Severance Agreement between the Company and each of Sidney Harman, Bernard A. Girod, and Kevin L.
        Brown. (filed as Exhibit 10.71 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000,
        Commission File No. 001-09764, and hereby incorporated by reference) **
10.24   Letter Agreement, dated April 24, 2006, between Harman International Industries, Incorporated and Douglas A.
        Pertz. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on April 28, 2006,
        Commission File No. 001-09764, and hereby incorporated by reference) **
 21.1   Subsidiaries of the Company. +
 23.1   Consent of Independent Registered Public Accounting Firm. +
 31.1   Certification of Sidney Harman filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +
 31.2   Certification of Bernard A. Girod filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +
 31.3   Certification of Kevin L. Brown filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +
 32.1   Certification of Sidney Harman, Bernard A. Girod and Kevin L. Brown filed pursuant to 18 U.S.C. Section 1350,
        as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +
**      Management contract, compensatory plan or arrangement.
+       Filed herewith.




                                                         64
                                             SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

                                     HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED


Date: September 6, 2006              By:   /s/ Bernard A. Girod
                                           Bernard A. Girod
                                           Vice Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of Harman International on September 6, 2006 in the capacities indicated
below.
  /s/ Sidney Harman                  Executive Chairman of the Board
  Sidney Harman


  /s/ Bernard A. Girod               Vice Chairman of the Board and Chief Executive Officer
  Bernard A. Girod                   (Principal Executive Officer)


  /s/ Kevin L. Brown                 Executive Vice President, Chief Financial Officer and Assistant Secretary
  Kevin L. Brown                     (Principal Financial Officer)


  /s/ Sandra B. Robinson             Vice President – Financial Operations and Chief Accounting Officer
  Sandra B. Robinson                 (Principal Accounting Officer)


  /s/ Gina Harman                    Director
  Gina Harman


  /s/ Shirley M. Hufstedler          Director
  Shirley M. Hufstedler


  /s/ Ann McLaughlin Korologos       Director
  Ann McLaughlin Korologos


  /s/ Edward H. Meyer                Director
  Edward H. Meyer


  /s/ Stanley A. Weiss               Director
  Stanley A. Weiss




                                                     65
Schedule II
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED
Valuation and Qualifying Accounts and Reserves
Years Ended June 30, 2006, 2005 and 2004
($000s omitted)


                                                                    Charged to
                                    Balance at     Charged to            other                Balance
                                    beginning       costs and         accounts               at end of
Classification                       of period       expenses      describe (1) Deductions      period


Year ended June 30, 2004

 Allowance for doubtful
  accounts                     $        13,785             3,751            233      9,112      8,657


Year ended June 30, 2005

 Allowance for doubtful
  accounts                     $         8,657             2,516             78      2,276      8,975


Year ended June 30, 2006

 Allowance for doubtful
  accounts                     $         8,975             2,167            256      2,660      8,738

(1) Net effect of acquisitions, dispositions and foreign currency translation.




                                                      66
Corporate Officers                                                                   Directors

Sidney Harman                                                                        Bernard A. Girod
Executive Chairman
                                                                                     Gina Harman
Bernard A. Girod
                                                                                     Sidney Harman
Vice Chairman and Chief Executive Officer
                                                                                     Shirley Mount Hufstedler (1) (2) (3)
Erich Geiger
                                                                                     Ann McLaughlin Korologos (1) (3)
Executive Vice President and
Chief Strategy and Technology Officer                                                Edward H. Meyer (1) (3)

                                                                                     Stanley A. Weiss (1) (2) (3)
Kevin L. Brown
Executive Vice President and                                                         (1)
                                                                                           Audit Committee member
                                                                                     (2)
Chief Financial Officer                                                                    Compensation and Option Committee member
                                                                                     (3)
                                                                                           Nominating and Governance Committee member


William S. Palin
Vice President–Controller
                                                                                     Annual Meeting
                                                                                     The Annual Meeting will be held on
Sandra B. Robinson
                                                                                     November 2, 2006 at 11:00 a.m.
Vice President–Financial Operations and
                                                                                     at the JPMorgan Chase Building,
Chief Accounting Officer
                                                                                     270 Park Avenue, New York, NY 10017.
                                                                                     A proxy statement will be sent to shareholders
Edwin Summers
                                                                                     on or about September 11, 2006.
Vice President–General Counsel and Secretary


Floyd E. Toole
                                                                                     Registrar and Transfer Agent
Vice President–Acoustics
                                                                                     Mellon Investor Services
                                                                                     400 South Hope Street, 4th Floor
Securities Traded                                                                    Los Angeles, CA 90071
New York Stock Exchange                                                              213-553-9720
Symbol: HAR



Corporate Headquarters                                                               Independent Auditor
1101 Pennsylvania Avenue, NW                                                         KPMG LLP
Suite 1010                                                                           355 South Grand Avenue
Washington, D.C. 20004                                                               Los Angeles, CA 90071
202-393-1101                                                                         213-972-4000
www.harman.com




The certifications of our Executive Chairman, Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act
have been filed as Exhibits 31.1, 31.2 and 31.3 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
Harman International Industries, Incorporated
1101 Pennsylvania Avenue, NW, Suite 1010
Washington, DC 20004
202-393-1101 www.harman.com

								
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